When seeking life insurance, your insurer will most likely recommend whole life insurance. This is one of the most comprehensive insurance plans that promise high payouts to the beneficiaries you leave behind. However, there is no doubt that whole life insurance is not a one-size-fits-all solution, and there are alternatives that may be better for you.
What Is Whole Life Insurance?
Before we get to the alternatives, let us briefly look at what whole life insurance is. Whole life insurance is a permanent insurance policy that involves two components: a death benefit and a cash value. Being a permanent policy, you pay premiums as long as you are alive. Both components are paid to your beneficiaries upon death, provided you paid all the premiums.
The cash value is where a portion of the premiums are placed and invested in the market on your behalf. As such, the cash value will increase over time, further increasing the amount your beneficiaries will receive when you die. However, this comes with a fair bit of risk – the cash value might decrease if certain investments don’t pan out.
Furthermore, as a policyholder, you can withdraw or borrow against the cash value. When you borrow, you are given a non-taxable loan with low-interest rates. The biggest drawback of this plan is that insurance rates are expensive, making it ideal for individuals whose net worth is substantial.
Now let us look at the alternatives of whole life insurance that might be better for you.
Variable Life Insurance
Variable Life Insurance is for people who can afford the premiums of whole life insurance but would like to take on more risk. This policy has the same hallmarks of whole life insurance, particularly that it’s a permanent plan and that there is a death benefit and cash value involved. The biggest difference is that you get to decide how the cash value is invested in the market.
If the insurer is handling the cash value, they will go for investments that are less risky. As you already know, the riskier investments pay more when they pan out. You have the power to go for these types of investments, meaning variable life insurance can potentially payout more than whole life insurance. It also means you could lose more.
You can also withdraw and borrow against the cash value. And it is worth mentioning that this won’t affect the agreed-upon death benefit.
Term Life Insurance
Life insurance isn’t always permanent and it doesn’t always come with high premiums. This is where term life insurance comes into play. It is a temporary life insurance plan where the policy is held for a fixed period of time. Term life insurance is 6 to 10 times cheaper than whole life insurance, and while it has a death benefit, it doesn’t have a cash value.
Your beneficiaries will get the death benefit when you die, but only if you died before the policy’s expiry and paid all your premiums. Once the policy expires while you are alive, the premiums you have been paying thus far are forfeited. If you die after this period, your family will get nothing.
In order to avoid the worst-case scenario (death after expiry), people usually renew their policies. And since the premiums are significantly cheaper than whole life and variable life, people usually purchase more coverage.
Conclusion
Life insurance is a must for anyone who has beneficiaries, especially a wife and children. No one knows what the future holds, and death can be sudden. It’s good to leave them financially secure. But whole life insurance isn’t always the best policy. There’s variable life and term life insurance that may be better for you.
