Life insurance comes in many shapes and sizes and finding the right fit for your life can be daunting to say the least. It can be tempting to simply find the least expensive solution and go with that. But like all products, sometimes the least expensive option can end up costing you more in the long run.
For life insurance, the low-cost option is called term insurance. This provides you with a set death benefit for a set amount of time (10 years, 20 years, etc.). However, every time a term policy automatically renews (as an example, every 10 years with a term 10 policy) your premiums go up drastically. In addition, term plans often expire before the insured’s life expectancy.
Insurance that lasts from now until the day you pass away is called permanent insurance, and it comes in many different forms. One of the oldest and most successful is called whole life. You can likely guess why it’s called that.
How are policies priced?
It’s helpful to understand how the premiums of all life insurance policies are priced. Think of it this way. In very simple terms, all policyholders pay their premiums in, and whenever a policyholder dies, their death benefit is paid out. Mathematicians known as actuaries work to predict the expected cost of any death benefits paid out each year, which is how your policy’s premiums are determined.
These actuaries try to be conservative with their estimates to ensure that there are always enough funds available to cover any deaths in a given year. But what happens if less people die than they expected, or if the investments of the fund earn more than they expected? In the case of most products, like term or non-participating products, the insurance company keeps the difference.
What makes participating whole life different?
With participating whole life though, that difference gets returned to clients in the form of dividends. These dividends can then be used to buy more paid-up insurance. The result is that your death benefit grows over time, while your premiums stay exactly the same. Best of all, whole life policies guarantee their premiums do not go up, your death benefit never goes down, and the policy even builds cash surrender values.
Is participating whole life right for me?
All of this being said, whole life policies are considerably more expensive than your typical term policy. So how do you know if one is right for you? Generally, there are two ideal use cases for a whole life policy. The first is to maximize the estate that you leave your loved ones. Participating Whole life policies tend to return very favourable rates of return over time, and the death benefit is received by your beneficiaries tax free, resulting in a very effective way of building a legacy for the next generation.
The other case is for building up value to be used during your life. By using a form of the product that builds early cash values, you’re able to borrow against the value in your policy to fund education, retirement, or any other lifetime need. When you pass away your tax-free death benefit can be used to repay any remaining debt.
Participating whole life policies are powerful financial planning instruments, but that doesn’t mean they’re the right solution for everyone. To learn more about whole life, and whether it’s a good fit for your needs, please contact my office to set up an appointment.