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Whole life insurance is a permanent life insurance product that offers you coverage from the moment the policy is issued to the moment that you pass.
If you are in the process of shopping for the right life product, you must consider not only the current life stage you are in, but also how your life can change and how that will impact your need for coverage.
By considering your short-term needs along with your long-term financial goals, you will be able to select a policy that suits you.
Buying permanent insurance is a major commitment because it is a financial product and a financial planning tool that you will need to budget to pay for for the remainder of your life.
Permanent plans each have their own structure, and structures are not one-size-fits-all for every applicant.
Here is your consumer guide to whole life insurance so that you can make a decision based on the facts and not what you may be told by a high-pressure life insurance sales agent.
Be sure to use the FREE comparison tool above to start your search!
What makes a whole life insurance unique?
Whole life insurance, which has been called ordinary life, is the original type of permanent plan that was offered by carriers. When you carry a whole life plan, you are carrying a plan that has a term life insurance component along with a saving component that earns interest.
As your policy ages, the death benefit will remain level but the cash account value will grow.
Unlike other permanent insurance plans that accumulate cash value, an ordinary life plan has a level payment.
This can be beneficial if you would like to know exactly how much you should be paying for coverage for the rest of your life.
How does whole life insurance work?
If you are only familiar with term life insurance, you may be wondering how it is possible that you can apply for insurance, have the plan issued, and pay the same exact premiums for the whole time that the policy is active.
Term life insurance offers level benefits and guaranteed level premiums for a term of 5, 10, 20, 30, or even 40 years. Once the policy is up for renewal, you will pay new rates based on your new age and health.
With whole life, there is no renewal and there are no new rates. The rates you pay at the age of application are the rates you will pay when you retire or when you are 90 years old.
Where do your premiums go?
Life carriers make this idea of level premiums for life possible by adding an investment component into the policy.
Unlike a term life plan, where you are paying for just pure life coverage, you will be paying for a combination of things.
Your whole life premiums include company expenses, cost of pure insurance, premium taxes, and a mortality charge.
The mortality charge is the charge that the company projects divided into monthly charges so that they are able to account for the risk.
So whole life carriers do take on more risk, but they are projecting the cost of the insurance in the beginning so that they can charge the right premium at the onset.
The remainder of your payments will go into a cash account. This account is invested in stocks and bonds that are diversified so that the account can grow.
The money in this account will be used later in your life to offset the cost the insurance as you are older. The level of your benefits will decrease as the level of your cash account grows so that you will always have the same death benefit.
Why is risk so important?
Buying whole life is a major commitment. Not only do you need to set a budget that you can afford for life, you also need to choose a death benefit that will help you meet your financial obligations.
It can help to know what personal factors can affect your premiums before you begin requesting quotes or before you apply for coverage.
Insurance is a product that is all about risk. The insurer must assess mortality and morbidity tables, review your lifestyle, review your medical history and even review your family history to determine how long you have to live. When you are buying permanent life that does not have an expiration date, assessing risk is a bit different.
The company knows that they will be obligated to pay out on a death claim at some time, but their goal is to pinpoint when that payout will be.
The longer the policy is in force, the more premiums the insurer can collect.
This is why there is a very thorough underwriting process when you buy even of a small whole life plan. It is up to you to be as honest as possible before the policy is underwritten so that you receive accurate estimates that will not go up once your records are reviewed.
What personal factors affect premiums?
There are many personal factors that can play a role in how risky of a policyholder you will be. The application process can uncover different medical issues, both known and hidden, so you should take the time to assess your own health before applying.
Here are some of the personal factors that could affect your ability to get whole life insurance or your premiums if you are approved:
Current Health Status
Your current medical condition is the first thing that the company will look at. If you have a minor condition or a more serious one, it can cause your premiums to go up.
The company may look at your vitals, your medical records and the prescription drugs that you take to determine if any of these will affect your life expectancy. Be sure to list anything that you are familiar with because you will sign a form saying the underwriters have access to your whole history.
Age and Gender
Your age and your gender both play a role in how long you are expected to live. The company has spent a lot of time researching data and statistics to create an actuarial life table. Women, especially in younger generations, are expected to live longer than males.
The region that you live in can also play a role in life expectancy due to the conditions of the environment around you.
Lifestyle and Occupation
Your lifestyle can have an affect on your life span. If you go skydiving or drag racing, you are more at-risk of getting into an accident than someone who likes to paint or dance.
What you do professionally can affect rates too. If you are a pilot who flies for work, you are expected to pay more than an executive in an office.
Driving Record, Smoking and Drinking
Your driving record does not just matter to an auto insurer, it also matters to a life insurer.
If you are reckless behind the wheel, you could get into a fatal accident. Recklessness is determined by your motor vehicle history and your claims history.
You are also more of a risk if you smoke or drink. Both of these habits reduce life spans, even if you are very healthy now.
Disclose all of this if you are a drinker or smoker to avoid misquotes because you will receive a higher risk classification.
When is whole life the right product?
Whole life insurance is not always the right choice, but when you have needs that will never go away it is best to buy a permanent plan. Term life insurance is the most popular type of life product sold because most people want to cover temporary financial obligations that will go away.
These include debt, dependent expenses, mortgage, and income replacement. While most financial obligations will go away at some point in time, there are some that will not.
Permanent insurance is ideal for people who need life insurance for as long as they live. It could be to pay for living expenses, estate taxes or other permanent expenses. It is also a great tool if you want to buy life insurance and you also want a savings vehicle that will grow on a tax-deferred basis.
Whole life is better than other permanent plans when you want to pay a level premium and you want to know what to expect.
Premiums for permanent life insurance are higher than term life because of the added risk and the savings component. If you want to price the cost of insurance, be sure to compare those prices through more than one insurer.
To compare premiums quick and easy online, you can use an online rate comparison tool that will show you how much you may pay with more than one company. Log in, enter all of your personal information, and then select a policy through a financially stable whole life insurance carrier.
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