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Pros and Cons of Whole Life Insurance

Deepika Misra Nov 20, 2018
For those of you who are confused about what things to consider before buying a whole life insurance, what are the pros and cons, here is the solution...
Nowadays people are getting smarter about buying insurance as they have a variety of options to choose from, and are well aware of the importance of insurance. Based upon their requirements, like some want accumulation of cash value, some prefer the life long protection, they choose various insurance plans.
Whole life insurance is one such insurance plan. Before we focus on the pros and cons, let us first of all know what this insurance is all about. It is a permanent insurance plan which provides life long protection as well as cash value.
A part of the premiums paid by the policyholder is used for making investments which earns interest, and is also accumulated in the form of insurance cash value. This cash value is tax-deferred, and can be withdrawn before the termination date of the policy.
If the insured person dies or surrenders, the cash value is given back. In case he is alive, the same can be realized on maturity as the face value of the policy. So a guaranteed payout is assured in case you die or stay alive, which is a complete win-win situation.
This life long protection comes with a price, the policyholder is supposed to pay the premiums called Level Premiums, which do not change over the entire life of the policy, in return for the agreed insurance, on a regular basis, to avoid lapse of the policy.
Unlike the term insurance wherein only a definite period of time is covered, say 25 or 30 years, it gives whole life protection plus the investment component. But before buying a whole life insurance one must analyze its pros and cons. They depend on what type of life insurance policies one chooses.

Whole Life Insurance Pros

✔ Life Long Protection: Whole life insurance has the advantage of giving protection the whole life of the policyholder. From day one, he buys the policy until death, as long as premiums are paid regularly. On the contrary, term life insurance gives death cover only for a specific duration, mortality element is paid if you die within the term, not after it.
✔ Tax Exempted Cash value or Savings: Cash value on a tax-deferred basis is the biggest advantage of the whole life insurance. One may take loan against the cash value, or get it back if one no longer wishes to continue the policy.
This factor goes on increasing if not withdrawn before the tenure ends, and is completely tax free. Cash value can also be used to supplement retirement income, or the emergency and other needs.
✔ Death Benefit: Death benefit is the value at which the policy was purchased, and it is free of tax.

✔ Level Premium: The premium value set at the time of policy purchased remains the same over the entire life of the policy. It does not increase like in case of a term insurance.
✔ Ease of Cancellation: One can surrender his policy if he no longer wishes to continue at any point of time, and get the cash value back.

✔ Dividends: Dividends can also be earned on a policy, but are not guaranteed.

Whole Life Insurance Cons

✘ High Cost of Coverage: As this insurance covers the entire life of the policyholder, the premium rates are also very high. Also over time, the cost of policy becomes an affordability issue for the families. Therefore many people switch to term insurance.
✘ Investment Tool: Many people take insurance as an investment tool, but the cash in value received is much lower than the other alternatives available in the market.
✘ Inflexibility of Handling: As the insurer himself manages the whole process, it is not possible to improve the returns of the policy by investing in different stocks or bonds.
Therefore, it is recommended that before you get your policy quotes, consider the various types of whole life insurance policies offered by different insurance companies which includes traditional, interest-sensitive and single-premium policies.
Traditional policies gives you a guaranteed minimum rate of return on the cash value, while interest-sensitive gives the variable rate on cash value, and is flexible in terms of changing the death benefit amount, without a change in the premium.
It totally depends upon the economy and rate of return on cash value. Lastly, single premium insurance is the one which is purchased by wealthy people. They buy the insurance up front in one payment.