Whole life insurance

Whole life insurance is an insurance policy that guarantees the payments in case of the death of the insured person. Other insurance policies usually guarantee the payment for a specified time span of for twenty or thirty years. When the policy ends the individual is left with nothing and has to seek for new life insurance policy. However, with the whole life insurance a person can be sure that whenever he dies, the money will be paid out to his dependents.

Advantages of whole life insurance

Guaranteed insurability is the biggest advantage of this kind of policy. An individual knows that even if his health deteriorates as he gets older or he starts working in a dangerous job, his life is going to be always protected. The premiums might be paid the whole time or until the certain time period. After that certain period an individual is still insured even though he does not need to pay premiums anymore.

Moreover, whole life insurance policy is usually associated with investment or pension funds. Thus, it is possible that premiums paid each month will have gains if value of the fund gets bigger.

The price of the premiums can exceed the premiums of the term life insurance two times or even more. It is important to know that the older the person is when signing whole life insurance contract the higher will be the premiums. Higher price of the premiums are caused by two reasons. First of all, the person is insured for the rest of his life. Secondly, part of the premiums goes into tax deferred cash value account. If a person decidesd that he wants to terminate his whole life insurance contract, he will receive the cash value of his policy. What is more, a person can borrow against this cash value account at a reasonable rate. However, borrowing from the cash value will reduce the death benefit.

Disadvantages of whole life insurance

However, whole life insurance has some disadvantages. Firstly, because it covers whole life and not a certain period of time as other insurance policies, its premiums are usually higher. Another thing is that from an investment point of view it is beneficial to have this insurance contract only if the policy lasts for long period of time. The reason behind this is that usually in the first years deductions of the premiums up to 100% may be applied by the insurance provider. During this time period the insurance company faces the highest risk and as a result uses the deductions to compensate the risk and pay the reinsurance companies. The money from the premiums that remain after all deductions can be invested in stocks, bonds or money market instruments.

Another disadvantage is that the whole life insurance policies usually come with high fees and commissions. These fees can be as high as 3 percentages of the annual returns from the investments. One of the most famous and most often used fees is called performance fee. This fee is used to motivate investment fund managers to search for best investment options. Investment funds that charge this fee deduct up to 20 % of increase in assets of the fund. Some companies even apply up front fees that can be very high. Usually only a professional can tell whether the fees and commissions of the policy will bring a decent return on the investments. Most policies bring a satisfying return only after 20 or more years have passed from the time the policy has been underwritten.

Types of whole life insurance

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There are three basic types of whole life insurance: level premiums insurance, limited pay insurance and graded premiums insurance. Level premiums insurance offers the individual the premiums that are guaranteed never to rise. Limited pay insurance seizes the premiums when the insured person reaches certain age. For instance, a lot of insurance companies leave the policy in force when the person reaches 80 years but do not require pay them the premiums. This option is beneficial because usually older people that are already retired have less money. What is more, they spend more money on drugs and as a result live on a tight budget. Graded premium insurance requires the policyholder to pay lower premiums in the beginning. However, as the time goes by the premiums rises because the person gets older and his health deteriorates. Graded premiums is a good alternative for people that cannot afford to pay high premiums at the moment but plan that their income will allow them to pay altered premiums in the future.

Making the decision

The premiums of whole life insurance depend on a number of factors: age, physical and mental condition, level of investment chosen and death benefit required. Insurance companies use proprietary formulas that allow them to set correct prices for different people. Since whole life insurance will last for the whole life of the person, the older is the person when he joins whole life insurance the higher premiums he will pay. The premiums of whole life insurance sometimes can be twice as expensive as the premiums for term life insurance. As a result, it is advisable to make the decision whether to join or not this type insurance policy in the early age.

It is also important to remember that a person will only have one chance to choose this type of policy. Although, it is possible to exit whole life insurance polices, it is expensive because cash value is much smaller than the value of the premiums paid. Therefore, the decision whether to join whole life insurance and which life insurance provider to choose has to be made very carefully. It is advisable to carry out a thorough research and compare as much offers from whole life insurance companies as possible. A wise idea is to ask the advice from a reputable independent whole of market broker. Broker can help the individual to save time or even offer a more preferable alternative to whole life insurance.

Last but not least, because whole life insurance lasts for a very long time it is important to choose a stable and reputable company with enough experience in investment. Ratings form financial institutions is a good way to find out about the financial soundness of the company. The best companies are rated AAA although different financial companies use slightly different schemes. However, it is important to remember that the highest rating from a financial institution does not guarantee that this company offers the best whole life insurance alternative.