Whole Life Insurance
The main decision about life insurance is always cast as a choice between term and whole, i.e. whether to buy a policy that only covers you for a fixed period of time or for your whole life. Yet, as with most things in life, that's a simplification. If all you want is some money for those you leave behind, you buy term life insurance because that's the cheapest type of policy. Yet here comes the news you prefer not to hear. Almost ninety percent of term life policies never pay out. Yes, a remarkable number of people either cancel their policy or live longer than the term. So, from the life insurance company's point of view, it prefers term life insurance because it takes in the annual premiums and only rarely has to pay any of it back.
Now let's come to the whole life policy from your point of view. You prefer this type of policy for two reasons:
- So long as you have met all the conditions about making the premium payments, you leave a cash sum to help out your family when you die.
- Perhaps more importantly, you also have an investment that can pay out during your lifetime.
If you buy a term policy, it's a very simple transaction, rather like a bet or renting a house. If you live beyond the date, the policy terminates. There’s no residual benefit of any kind. Nor can you cash in the policy during the term. You never get any of your money back. But with a whole life insurance policy, there's a cash value generated by the insurer who invests your installment payments. If you search around, you should find policies that pay a dividend of at least 4%. Better still, the investment income added to the value of your policy is tax free. If you want to realise that value during your lifetime, you have three options. You can:
- borrow this cash sum;
- surrender the policy and receive a proportion of your installment payments;
- sell the policy on a specialist market.
Having this money saved is very convenient. If there's an emergency, this cash can avoid having to raid your 401k or other savings. Even better , it avoids having to borrow from a bank or worse, increase the debt on your credit card where the interest rates are really high. That said, there's no limit on what you can do with the cash. It could be the down payment on your new home or pay for a wedding. But before you exploit the flexibility built into this long-term investment, make sure you’re getting good value for money by borrowing the money or surrendering the policy. Although some doubt the value of whole life insurance, it does serve a purpose and, if used properly, can be a useful fund of cash. Take advice on your personal circumstances before you buy and if you're thinking of drawing down some of the cash value.