What Is Whole Life Insurance?

what is whole life insurance policy coverage

The pause of the coronavirus pandemic has given many Americans across the country time to think about their futures. A halt on all day to day activities has made many reconsider certain paths and recontextualize the future. 

If you yourself are thinking about the future more these days, you might be considering the question of life insurance. Should you get it and what kind should you purchase if you do? Many Americans, unfortunately, do not fully understand how life insurance works.

Many who do get life insurance end up going with what is known as whole life insurance. What is whole life insurance? Read on and we'll walk you through everything that you need to know.


What Is Whole Life Insurance?

Life insurance is a sort of insurance that people put in place to protect their families and loved ones after they are gone. If a person with a life insurance policy passes away, the cash payout of their life insurance is passed on to their family.

The family can then use this money to weather the passing of their loved one and to get by.

Whole life insurance, specifically, is a type of permanent life insurance that provides lifelong coverage to an individual. This insurance promises a variety of things, including a guaranteed minimum rate of return, a consistent premium payment amount, and a guaranteed death benefit.

If you're not familiar with how life insurance works, these phrases might not mean much to you yet. But we'll walk you through what they mean below. The important thing to understand is that when an insured person passes away, the beneficiaries of the policy can claim what is known as a death benefit– the cash that is intended to get them by during this difficult time.


How It Differs From Other Life Insurance

What is the key difference between whole life insurance and other life insurance options out there for consumers to choose from? The other popular form of life insurance is known as term insurance. 

Term life insurance only is in place for a certain amount of time. It has the possibility of expiring. If a person were to take out term life insurance but passed away after the term had ended, the beneficiaries of the insurance would not receive any money.

Whole life insurance provides a guarantee that when the person passes away, the beneficiaries WILL receive a cash payout. 

The other thing to understand is that the main portion of a whole life insurance policy payout comes from what is known as a cash value account. Portions of the monthly premium payments one makes will go towards this cash-value account, which grows and builds interest over time.

Similar to a 401(k), a family could take money out from this account prior to the death of an individual. However, once the money is taken out of the account it becomes taxable. In a way, the account works much as an account at a family bank might work. 


Understanding Growth Rate

The growth rate of a cash value account will vary from insurance policy to insurance policy. It can take a great deal of time for the value of this kind of account to surpass the cost of various premium payments. For this reason, many people who take out a whole life policy do so very early in their lifetimes.

This way, there are many years ahead for the account to grow in size and value. Regardless of the cash value account, most whole life insurance policies will offer a guaranteed death benefit payment.

However, the size of this payment will vary from plan to plan. 


When The Insured Passes Away

As we've mentioned, the major benefit of a whole life insurance policy is that it will remain in place up to the insured individual's death. There is no way to outlive or end it except for a failure to pay the monthly premiums.

For most policies, the cash value of the account will actually revert to the insurance company if it is not taken out prior to the insured person passing away. As such, it's important that a family take out the cash value before the insured person dies if they want to retain that value themselves. 

Some plans will allow for a rider that gives beneficiaries of an insurance plan both the death benefit and the accumulated cash value of a plan once the insured individual passes away. However, often this comes at the expense of higher monthly premiums.


Deciding on Premium Costs

How does an insurance company land on the monthly cost of a whole life insurance plan? It's a good question. Most insurance companies will rely on a variety of factors. 

These include basic information on a person such as their age, gender, height, weight. As you might expect, it takes the past and current health conditions of an individual heavily into consideration. Family medical history is also deeply considered.

A person's personal history also matters. Their credit background, criminal history, driving record, and even their hobbies are considered. Why hobbies? If a person is known to engage in dangerous activities, such as rock climbing, an insurance company might charge more.


Understanding Whole Life Insurance

What is whole life insurance? It's a form of insurance that at the end of the day might not be for everyone. Those who get whole life insurance early on in life, however, can reap huge benefits for their families and those who they leave behind once they pass.

Need more personal finance and life insurance advice? Keep scrolling our blog for more. Visit the Insurance section of the Bootstrap Business Blog to learn more about policy coverage.

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