The pros and cons of Whole Life Insurance

A Brief Overview of Whole Life Insurance:

Whole Life Insurance is permanent life insurance protection for your entire life, usually to age 100. A Whole Life policy is contractually guaranteed not to lapse, provided that you pay sufficient premiums each year to keep the policy in force. Whole Life Insurance features a savings element that allows you to build cash value on a tax-deferred basis. A portion of the premiums you pay build up the savings element of the policy and are invested by the company. The interest rate return on your investment is added to the savings portion of the policy. This is how the policy builds cash value. In addition to crediting your policy with interest, some policies issued by mutual insurance companies may also give you the opportunity to earn dividends. Dividends are distributed by mutual insurance companies when they operate at a profit. They are not guaranteed but they offer extra incentive to choose a whole life policy.

Pros:

Whole Life Insurance has a savings element (cash value) which grows tax-deferred. If the contract is set up properly in advance, you might build up enough cash value to stop paying premiums by a certain age, or to borrow from the cash value (take a policy loan) during your lifetime on a tax-advantaged basis. Unlike Term Life Insurance, whose premiums eventually rise after the initial guarantee period, Whole Life Insurance premiums will not increase during your lifetime (as long as you pay the planned amount and repay any policy loans). This policy is good for older families that are unlikely to significantly alter their future plans.

Cons:

You are not allowed to choose separate investment accounts, i.e., money market, stock or bond funds; the insurance company controls how and where your premium dollars are invested. Whole Life Insurance offers no premium flexibility or face amount flexibility; the plan you buy today remains fixed for life. It is therefore important to plan carefully, because Whole Life Insurance is not very good at adapting to insurance and/or retirement plans that change significantly.