Try to get an answer to the question, “Why buy Whole Life Insurance?” and you find endless debates trying to argue the value of whole life versus term life insurance. But, you would do well to move past this eternal contest and settle some personal concerns.
Term Insurance has an important purpose and should be part of every responsible person’s portfolio. Term insurance has no cash value, and it is priced based on your age, underwriting eligibility, and the desired length of coverage. It is an excellent, low-priced option especially geared to protect your beneficiaries – in the event of your death – for the length of a mortgage, a child’s college education, or similar obligation that corresponds to a calendar need. It is often used as a rider on a whole life insurance policy to maximize the death benefit during a set number of years.
Term Life and Whole Life are not the same, nor are they interchangeable. Whole Life serves its own specific needs:
- By definition, it protects your beneficiaries for a set face amount for the duration of your life, and with people working and living longer, the cost of dying has increased.
- Whole Life accumulates a cash value that offers a number of options including withdrawal or “borrowing.”
- Insurance benefits pass tax-free to beneficiaries.
- It has potential as a tax-deferred investment – especially in the variable or variable universal forms.
Whole Life insurance provides value for a number of needs:
- By offering lifetime coverage at a price determined by your earlier age, Whole Life is there to pay your funeral and last expenses.
- You can design the death benefit to cover other final expenses including probate and taxes.
- After your death, it can continue to provide supplemental income to a spouse or child in addition to the final expenses.
- Its value can serve to improve a business buy-sell agreement.
- With financial planning advice, you can use whole life insurance benefits to fund, contribute to an estate, and/or make a distribution to a non-profit, such as your college or favorite charity.
Critics would caution against permanent life insurance as a growth investment, and that may be the worth a separate discussion. While investment potential may not be the primary motive to buy, there are tax advantages worth serious attention. For example:
- The accumulating cash value is not subject to current taxation because it is unrealized income.
- There is no federal income tax payable when you borrow from the cash value because the loan is a debt – not a taxable distribution.
- The policy face amount is paid to your beneficiaries without income tax deductions or withholding.
- You can avoid taxes on the death benefit if, with the advice of your lawyer or tax accountant, you transfer ownership of the insurance policy to a trust or a beneficiary more than three years before your death.
The most significant objection to Whole Life Insurance products may be the cost. The out-of-pocket premium for whole life is higher than it is for term life. The value, however, is a customer perception. A smart shopper will weigh needs and benefits with price and probably find value-pricing in a structured financial portfolio that includes both Term Insurance and Whole Life Insurance.