Consider whole life insurance if you want
- insurance coverage for life
- premiums that won't increase
- a death benefit that guarantees what the policy will pay upon claim
- a long-term plan not dependent on investment gains or losses
- a policy you can surrender at any time in the future with a guarantee that the current cash value of the policy will be returned to you
Use whole life insurance to
- Develop wealth for the next generation (estate creation) through life insurance coverage that is normally greater than the accumulative amount of your premiums.
- Pay the taxes that are automatically due at the time of death, saving your estate from government tax erosion (estate preservation).
- Arrange a buy-sell agreement [link to How does whole life insurance work?] for your business, in which each partner takes out insurance on the other to provide money to purchase a deceased partner's portion of the business.
- Initiate a pension plan for your spouse and, at the same time, enjoy a greater income through pension maximization . [link to How does whole life insurance work?]
- Create a legacy for your chosen charity by donating some or all of the insurance proceeds.
How does whole life insurance work?
Whole life insurance is the most established kind of permanent insurance. The simplicity of its features level premiums, permanent coverage and guaranteed death benefit has led to its success. And recent developments make whole life insurance even more attractive.
You choose the length of time you pay premiums, after which the policy is fully paid for. The most common options are pay to age 65, 20 year pay, 10 year pay, or even a single lump-sum payment.
If you choose to stop paying premiums, you can use the value of your policy to
- Purchase a term insurance policy equal to your current death benefit. Naturally, when the policy term is over, your insurance coverage ends.
- Purchase a whole life policy with smaller death benefit, for permanent coverage and a fully purchased policy.
- Take repayment of the cash value at the time of surrender. Future cash value (the amount available upon policy cancellation) is guaranteed, an attractive feature when markets are volatile.
Cash values and death benefits of whole life policies can be guaranteed because they follow a formula. The money in the policy becomes part of an actuarial reserve" invested so that it earns a known rate of return. The insurance company knows how much in premiums a policyholder will pay and how much the money will earn, so it can guarantee the policy's future value.
The value can only be guaranteed if the amount in the policy doesn't fluctuate. So you can't make cash withdrawals from a whole life policy as you might from a universal life policy. You can borrow against the money in your policy. But you must pay the money back with appropriate interest to maintain the balance of the policy.
Whole life insurance is also used in corporate environments. As well as funding a buy-sell agreement, it also provides a retirement plan for the employee insured. In a buy-sell agreement, company partners take out insurance policies on each other to fund purchase of a deceased partner's share of the business or for continuance of the business if a significant partner dies (e.g., the brains behind a software company).
At the same time, a whole life insurance plan provides additional retirement money through the increasing cash value of the policy. By the time the employee retires, a considerable sum (tens to hundreds of thousands of dollars) can exist in the policy, which can be accessed by surrendering the policy. Offer this to your key employees as a great bonus. It will help you attract high-quality personnel.
Pension maximization is the smart way to enjoy a greater income while creating a pension plan for your spouse.
When you retire and select a joint survivor option, you will essentially buy an ultra-expensive insurance policy to maintain income for your spouse after your death.
But perhaps your spouse will die before you do. In this case, you can't cancel the policy and you'll continue paying premiums for something that won't be used. You can't name another beneficiary. And, in the event that both you and your spouse die (in a common disaster), the money will be gone.
Instead consider buying an actual life insurance policy to provide an income for you and your spouse. Choose the maximum pension income and purchase a whole life insurance policy with the difference.
When your spouse collects the policy, he or she can buy annuities with the proceeds, for a guaranteed lifelong income. And, in the event of a common disaster, your pension will go to your family. Selecting the maximum pension also maximizes any cost of living increases. So you'll have a larger income, a pension plan for your spouse and a pension that doesn't die with you.