Whole Life Insurance Explained So You Can Understand
A problem for many people just getting started in the world of life insurance is trying to understand what whole life insurance really is. There are so many different variations of life insurance products out there, it is tough to distinguish what product you actually need and will be best for your situation. The primary goal of this article is to make sure to have whole life insurance explained in a way that makes it easier to make an informed decision.
Whole Life Insurance Basics Explained
The best way for whole life insurance to be explained is to start with the basics of whole life insurance. The two primary types of life insurance that you will hear discussed are term insurance and whole life insurance. There are a number of really good articles written on the differences of whole life vs term life. For a more in depth study of these subjects, we recommend exploring the articles found here at the Life and Health Guru.
To explain the difference between whole life insurance and term insurance on a very basic and abstract level, it is best to make the comparison with renting and buying a home. When you rent a home, you are paying someone else for the right to stay in their property. They provide you a contract for a set number of years, and give you assurance that you are going to be the sole tenant and receive the terms of the contract.
Whole life insurance is explained not by renting your home, but by purchasing a residence. Rather than pay someone else for the right to live a set number or years, you are making a contract to purchase the rights to live there for the rest of your life. Whole life insurance is not defined by a set number of years such as 10 year term life or 20 year term life contracts are. You are paying for a contract that will last you until you die, regardless of when that is.
Similar to the renting versus owning metaphor, whole life insurance generally tends to be more expensive in the early years. Whereas it is normally cheaper to rent than own, it is also cheaper to purchase term life than whole life. But as the years pass and the cost of term life increases with inflation, the cost of your whole life policy remains the same.
The breakeven point of this scenario tends to be around 7 years. Once you reach the 7 year mark, the whole life policy is generally cheaper than what you could purchase with whole life. Financial fads tend to suggest that you only purchase term life policies as they tend to be cheaper, however once you have whole life insurance explained to you, you can begin to see the benefit of paying a little bit more now, to pay less in the future.
Whole Life Insurance Details Explained
As stated above, when advisors and agents attempt to have whole life insurance explained to you, they tend to focus on comparisons with term life insurance. With the comparisons aside, let’s approach some of the details of the whole life policy.
The whole life policy is intended for the life of the individual, and does not expire after a set number of years. Regardless of how your health gets or whether or not you continue to qualify for an insurance policy (we all know that qualifying is the difficult part), you will retain the insurance policy.
The payments to the policy are generally made each and every year of that the policy remains in force. These can be monthly or yearly payments, and are typically predetermined upon the creation of the contract.
To understand whole life insurance, you also need understand that the account begins to accumulate a cash value as payments are made and the years progress. This cash value can be borrowed against and helps to determine the value of the account if you choose to sell it at a later date. It is also used in some estate applications.
A comprehensive explanation of whole life insurance would also have to mention that the insurance policy can sometimes be designed so that payments are made only in the first couple of years. If the account value is added to too quickly, it runs the risk of being classified a MEC, however, with careful planning, payments to the account greater than required can be made.
One last thing to explain with a whole life insurance account is that loans can be taken from the account at almost any time. These loans are taken from the cash value of the account and are taken tax-free. The loan will often bear a low interest rate until it is repaired, though you are never required to repay the funds.
To have whole life insurance explained so you can understand may take more than one article and ten minutes of your time. Hopefully this has given you a pretty good head start however. We encourage you to read some of the other article at the Life and Health Guru to help you in your quest to understand whole life insurance and get the explanation you require.
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