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Insurance
Whole Life Insurance |
Whole life is the original
type of cash value insurance. As its name implies, you're covered for as long as you're
living. When you die, a death benefit is paid to your beneficiaries. With whole life, you
pay a level premium based on the age you begin coverage. Part of your premium goes to
insurance and the rest goes into a cash value account. Unlike term insurance, your
premiums never increase. Once all your premiums are paid, your policy remains in effect
until you die.
There are four basic elements of a whole life policy: death benefit, cash value, fixed
rate of return and premium. Each part is guaranteed to remain in effect for the life of
the policy.
Your cash value increases each year based on a minimum fixed interest rate -- usually very
conservative (4%). You can borrow against your cash value and decide when or if you want
to pay the loan back. If you die before the loan is repaid, your insurer will subtract any
outstanding loan from your death benefit.
Some whole life policies are known as participating because they pay dividends to
their policyholders. Premiums for these policies are more expensive than nonparticipating
ones. Dividends are the result of higher-than-expected returns and low mortality rates --
they are not guaranteed. When dividends are issued, however, you can use them to reduce
premiums, buy more insurance, or simply take them as cash.
Advantages:
- Policy doesn't need to be renewed.
- Guaranteed death benefit.
- Fixed premiums.
- Tax-deferred earnings.
- Option to withdraw cash value.
Option to borrow against cash value.
Drawbacks:
- Initial premiums are higher than term insurance.
- No control over the way your cash value is invested.
- Requires a long-term commitment to make the policy worth the cost.
Next: Universal Life
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