Whole Life Insurance - a Short Explanation

When you purchase a whole life insurance policy, you are getting a permanent policy. Having a “permanent” policy means that you are responsible for paying the premiums until you die. This is different than term life, which is only effective for specific periods of time and must be renewed at higher premiums or converted into a permanent policy.

While your whole life policy is in force — that is paid for and active — your premiums are locked in at one fixed price. This does not change. The amount you pay in to a whole life insurance policy builds cash value. This means that you make money on your policy. Depending on your choice, dividends may be sent to you directly or they can be applied to lower your monthly premiums. The money you make on a whole life insurance policy is exempt from taxes and will not be counted as income on your yearly income tax.

Whole life insurance gives you the right to withdraw money from the policy while you are alive. You can borrow money against the face value of your policy. Of course, doing either of these will reduce the benefits to your beneficiaries if you do not replace the money before your death.

With whole life insurance, you are not involved with the investment process. The company makes these decisions for you. You cannot raise your face value or alter your premium payments (other than by applying dividends). The face value is locked in from the date of purchase.

The benefits of having a whole life insurance policy include passivity, moderate dividends and of course, benefits to your loved ones upon your death. If you prefer to be involved in investment and want to be able to raise the value of your policy at your own discretion, a whole life insurance policy is not for you.

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