A whole of life policy, on the other hand, will suit those of us who want protection for the rest of our days. This kind of life insurance is designed to last until you die – so you’ll be covered in the short, medium and long term. This is a very popular type of life insurance because it allows you to build a cash value on the policy and is on a basis that is tax-deferred. The way this works is that a portion of the premium you are paying is put into an account of savings that the policy invests into. All interest that is earned upon the policy is put into the savings and helps to build the cash value. Once the cash value reaches a higher level, you could be required to pay the premium after age or you could be allowed to borrow against that cash value.
Another attractive benefit of having a whole life insurance policy is that your premium will always remain the same. At no time will the amount change at all, therefore as long as you continue to pay the premium each month, you will remain at the same amount for the entire time. If you choose to take a loan out on the cash value you have earned, the only difference you will have to pay is paying back that loan. One downside to this policy is the fact that you will have no control whatsoever over how the company chooses to invest the dollars you pay on your premium.
A lot of people who opt for this kind of life insurance do so because it can be set up to help with issues such as inheritance planning, although many people simply prefer to get cover that is guaranteed to make a payment at some point so that they feel that they are getting some return on their policy payments. There is a guarantee of payment with a whole of life policy that isn’t there with a term policy. Once your term policy is finished that really is it – you are only guaranteed a payment if you do die while the policy is in force.
There are two elements involved with whole life insurance—the mortality charge, which pays for the insurance coverage, and the investment component, which earns interest and claims to act as a savings mechanism. However, as the policyholder ages, the mortality charge increases and the investment component decreases. Plus, the cash surrender value (the amount you would get back if you cashed in your policy) is not always what it appears to be. It fluctuates with markets, making its relation to reality a difficult one.
Wealthy people sometimes use whole life policies as an estate-planning vehicle. They can set up an insurance trust, which applies the proceeds of the policy to their estate taxes when they die. That can save their heirs the considerable expense of settling the estate with Uncle Sam.