There are several types of life insurance available. When shopping for life insurance, you have the choice between a whole life policy, with or without participation, term life insurance, and universal life insurance, among others. Whole life insurance is particularly interesting for individuals who want a policy that will not expire. It also includes an investment or cash value component. Here is everything you need to know about whole life insurance.
The basics of whole life insurance
Also known as permanent insurance, whole life insurance provides coverage for your entire life. The premiums associated with this insurance are usually guaranteed and remain constant. No surprise increase in sight! Depending on your contract, you may have to pay premiums for a fixed period or for your entire life.
Cash value and participation
This form of insurance includes a cash value, which means that you will receive a portion of the invested money if you terminate your contract. The cash value is an amount that the insured can receive from the insurer if they voluntarily terminate their contract before its expiration. The guaranteed values are specified in the policy. They generally increase until you reach the venerable age of 100.
It is possible to take advantage of the cash value of a life insurance policy without actually terminating the contract. First, you could request a policy loan. This involves borrowing against the cash value as collateral. It is a loan with interest that you will have to repay. Then, you could choose to surrender the cash value to your insurer. You will then receive a reduced paid-up life insurance and will never have to pay premiums again. This is a lower amount of insurance than specified in the initial contract. You will be covered without having to pay premiums until your death, but for a lesser amount.
Whole life insurance with participation
There are two variations of whole life insurance: with or without participation. Participating whole life insurance includes an investment component, which is managed by the insurer. Because of its investment component, it is generally more expensive than traditional whole life insurance. It is primarily aimed at affluent clients. Investment decisions are made by the insurer and applied to the pooled account. This is ideal for policyholders who do not want to manage their own investments. This type of insurance offers the opportunity to take advantage of many benefits associated with the growth of the cash value.
The “with participation” aspect means that the insurer may pay you something called “participations” or “dividends” (even though they are not actual dividends). These participations can take the form of cash back, accumulation of amounts added to the death benefit, or reduction of the insurance premium you pay, for example. They can also be given as a paid-up additions (PUA) which increases your current insurance amount and can in turn offer you further participations.
However, there is no guarantee that the insurer will pay these participations. The insurer generally pools the premiums it receives from several participating life insurance policyholders into a fund. It manages the fund, including investments and expenses related to the pooled insurance. When a surplus appears in the fund over time, the insurer may keep a portion, pay a portion to policyholders as participations, and let the rest accumulate in the fund.
Let’s say you have taken out participating whole life insurance. Instead of investing $5,000 in an investment account each year, you use that amount to pay for your whole life insurance. Your goal? To build a substantial legacy for your children. Your estate is guaranteed to receive at least the amount specified in the contract, for example, $200,000, and possibly more through participations. You choose to receive your participations as paid-up life insurance (PUA). You will then not have to pay additional premiums to add an additional amount to your life insurance. The total amount of the benefit could double in about thirty years.
Whole life insurance without participation
In this variant, the premiums are lower, but the insurer cannot pay participations. It is less expensive. Note also that premiums must be paid for a certain number of years to accumulate a cash value.
Do you need Whole life insurance?
For those looking to minimize the cost of their insurance, other options may be more affordable. Whether whole life insurance is more advantageous than term life insurance is specific to each individual. It depends on your needs. If you want to maximize the value of your estate and cover taxes on illiquid assets, such as a family business or real estate, whole life insurance is interesting. On the other hand, if your goal is to allow your spouse or children to maintain their standard of living or to repay your debts, term life insurance may be more appropriate.
Compare before choosing
Before opting for a whole life policy, compare life insurance offers. During this process, inquire about the insurer’s history of participation payments. Do they have a good track record of paying participations? Also, ask insurance company representatives to provide you with scenarios that compare each product: premiums, benefits, cash value, etc. They will help you determine how many years participating life insurance could become more advantageous than another type of insurance.
Why add life insurance for children?
By taking out a life insurance policy, your insurer may offer you a life insurance amount for your child. Sometimes, it is free with your policy. If not, you can still take out insurance for your children. You will then pay premiums for several years. What can it be used for? Some parents use the cash value of this policy to secure a loan. For example, they can use it to buy a car for their child or pay for their tuition fees.
Premiums for whole life insurance are higher than those for term life insurance, at least in the early years. Premiums for term life insurance generally increase at renewal. Thus, the amount of current premiums should not be the only criterion guiding your choice of life insurance. In addition, there is another option for individuals interested in the investment component of whole life insurance, without the hassle of participations.
Universal life insurance, between protection and investment
Universal life insurance is permanent (for life) and allows you to decide the amount and payment period of premiums, depending on the contracted policy. You have the power to choose investments for the amounts accumulated in your cash value account.
A fraction of your premiums are used to cover the cost of insurance, while the rest is invested to build capital. Thus, when taking out insurance, premiums exceed the cost of insurance. For example, if the cost of insurance is $400 per year, the insurer may require payments of up to $1,200. The excess is invested. However, it should be noted that the cost of insurance may increase over time. On the $1,200 you pay annually, the portion dedicated to investment will become smaller.
One essential difference between universal life insurance and whole life insurance is your control over investments. Here, you have the choice to invest funds in various types of investments. The accumulated amount can be used to cover the cost of insurance or for withdrawals. Thus, the cash value of your universal life insurance policy increases based on the return of the investments you have chosen.
Let’s go back to the example of universal life insurance that costs $400 per year, but for which you can contribute a maximum of $1,200. You decide to pay $1,000 per year. The surplus of $600 accumulates in your account and generates an average return of 5% per year. After 25 years, you have accumulated enough money in your account to have the freedom to stop paying premiums for the rest of your life while remaining insured (covered by this amount) or to withdraw the funds for personal projects.
|Whole Life Insurance||Universal Life Insurance||Universal Life Insurance|
|Investment||Yes, chosen by the policyholder||Yes, chosen by the policyholder||No|
|Duration||Lifetime||Lifetime||Limited coverage duration (10 to 30 years)|
|Premiums||Fixed||Flexible, you can decrease or increase your premiums||Often fixed|
|Tax Impact||Death benefit is non-taxable + investment account grows tax-free until withdrawals||Death benefit is non-taxable + investment account grows tax-free until withdrawals||Death benefit is non-taxable|
|Surrender Value||Surrender value with a guaranteed amount||Surrender value without a guaranteed amount||No surrender value|
FAQs about whole life insurance
It is a type of insurance that protects your loved ones if you pass away. The beneficiaries, such as your children or spouse, will receive an insurance payout after your death. It is permanent because you are insured for your entire life, as long as you comply with the terms of your contract. Compare life insurance to choose the one that suits you.
There are several variations of whole life insurance, but in general, it is life insurance that guarantees a payout amount that will be paid to your beneficiaries after your death. It usually includes a cash value, which is an amount that you can recover if you cancel your policy or that you can use as a loan. Typically, you pay fixed premiums to benefit from the insurance. Your insurer may also pay you participations. These are amounts in the form of a discount or an increase in the value of your insurance.
It is not bad to choose whole life insurance if it meets your needs. It usually costs more than term life insurance, so only choose it if you really need it. For example, if you want to maximize the value of your estate and cover taxes on illiquid assets, such as real estate, whole life insurance is interesting.
You can request a loan based on the cash value (or a policy loan) of your whole life insurance. However, you will eventually have to repay it. If you die before that, the insurer will reduce the payout to your beneficiaries to reimburse themselves.
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