California Whole Life Insurance
What Is Whole Life Insurance
As the most basic form of cash-value life insurance, whole life insurance is a way to accumulate wealth as regular premiums pay insurance costs and contribute to equity growth in a savings account where dividends or interest is allowed to build-up tax-deferred.The insurance component pays a stated amount upon death of the insured. The investment component accumulates a cash value that the policyholder can withdraw or borrow against
Whole Life
Whole life insurance provides lifetime death benefit coverage for a level premium in most cases. Premiums are much higher than term insurance at younger ages, but as term insurance premiums rise with age at each renewal, the cumulative value of all premiums paid across a lifetime are roughly equal if policies are maintained until average life expectancy. Part of the insurance contract stipulates that the policyholder is entitled to a cash value reserve, which is part of the policy and guaranteed by the company. This cash value can be accessed at any time through policy loans and are received income tax free. Policy loans are available until the insured's death. If there are any unpaid loans upon death, the insurer subtracts the loan amount from the death benefit and pays the remainder to the beneficiary named in the policy.
Whole life as a "death benefit with a savings component". The cash value reserve builds up against the death benefit of the policy and reduces the net amount at risk. The net amount at risk is the amount the insurer must pay to the beneficiary should the insured die before the policy has accumulated an amount equal to the death benefit. It is the difference between the current cash value amount and the total death benefit amount.The insurer is actually setting aside money as a cash reserve to pay the future death benefit claim. This suggests that the cash value is technically part of the death benefit, which is "earned" as cash over time. The lack of separation between the cash value and death benefit also explains why insurers do not pay both the death benefit and the cash value to the beneficiary.
The advantages of whole life insurance are guaranteed death benefits, guaranteed cash values, fixed, predictable annual premiums and mortality and expense charges that will not reduce the cash value of the policy. Riders are available that can allow one to increase the death benefit by paying additional premium. One such rider is a paid-up additions rider.
The death benefit can also be increased through the use of policy dividends, though these dividends cannot be guaranteed and may be higher or lower than historical rates over time.
Dividends paid on a whole life policy can be utilized in many ways. First, if "paid-up additions" is elected, dividends will purchase additional death benefit which will increase the death benefit of the policy to the named beneficiary. Since this additional death benefit generates cash value, it also increases the cash value of the policy. Another alternative is to opt in for 'reduced premiums' on some policies. This reduces the owed premiums by the non-guaranteed dividends amount. A third option allows the owner to take the dividends as they are paid out (although some policies provide other/different/less options than these - it depends on the company for some cases). A final option is to invest the dividends in the insurance company's general or separate account.
Are the Higher Premiums Worth the Cost?
Are the higher premiums worth the cost? In a word, yes.
The first key advantage of whole life insurance is that the cost of the premiums paid to the policy never increases, as long as you make sure to pay the premiums and the policy doesn’t lapse. The reason why this is important is because with term policies, your rates rise over time. This is due to the changes in your health and age. As you get older, your chances of dying increase. Since the life insurance company takes on that risk, they increase the cost of premiums.
With whole life insurance, the premium cost stays the same as long as the policy is in force. Even if you become gravely ill, the cost never changes. It’s guaranteed – as long as you pay your premiums. In fact, as the years go by, the policy actually gets cheaper. This is because of inflation, which erodes the value of money. By having a premium that never changes, you are essentially paying for the policy with “cheaper dollars.”
Whole Life Protection
Protect your family or business no matter what lies ahead with New York Life Whole Life insurance*, a permanent policy that remains in effect from the day you purchase it until you die, as long as premiums are paid.
The policy’s death benefit can be used for:
- Survivor needs
- Mortgage protection
- Wealth transfer
- Charitable giving
- Business needs
The cash value that accumulates in whole life policies can also be accessed during your lifetime through a policy loan and used for:
- Supplementing retirement income, as your need for life insurance decreases
- College tuition expenses
- A down payment on a home
- Emergency and other needs
Please note that loans against your policy accrue interest at the current variable loan interest rate and decrease the death benefit and cash value by the amount of the outstanding loan and loan interest.
Cash Value
In whole life policies, the premiums paid go toward increasing the cash value and, if you are willing to pay more, increasing the death benefit. Further, your cash value earns interest similar to a savings account.
Your cash value and death benefit can never decrease in value unless you start withdrawing the cash value from the policy, or unless you stop paying your premiums. In this way, your whole life policy is similiar to a savings account: When you pay your premium, part of the money goes toward the insurance costs, while the rest goes towards increasing your cash value. This cash value earns interest, which is guaranteed by the insurance company, as is the death benefit. The guarantee is as strong as the company that holds your policy, so financial stability is a key element in choosing an insurance company.
Tax Advantages
When you put money into your 401k or traditional IRA, you are only deferring taxes, as you pay taxes on all of the money when you withdraw it during retirement. With a whole life insurance policy, you pay the premiums with after-tax dollars. The cash value grows withouttaxation. You would only be taxed if your withdrawals from the policy exceed what you put into it, and you have the ability to remove gains tax-free by taking a loan off the policy.
Dividends
The whole life policy pays a dividend. The key thing here, again, is that these dividends aren’t taxed, but are considered returns of premium. So, if at the end of the year the insurance company pays out $1,000 in dividends on your policy, you don’t pay taxes on that money. You can take that money in the form of a check, reinvest it in the cash value of the policy, or use the dollars to purchase additional, paid-up insurance. Those dollars will buy more life insurance, provide a bigger death benefit, and earn interest.
What is a life insurance rider?
Riders are amendment or special additions added to the life insurance policy, providing some specific coverage at the request of the policyowner. Each rider usually costs the policyholder an additional amount.
The amount of and the kinds of life insurance riders one needs varies from person to person. Your lifestyle, your beneficiaries’ needs will all need different coverage needs and therefore, different life insurance riders. But some life insurance riders are fairly universal and generally a good idea for every policyholder to add to their life insurance policy.
Riders
Everyone, especially those who contribute to household incomes, should consider adding riders to their life insurance policy. It’s true; a life insurance policy isn’t exactly the happiest of topics at the dinner table. But when your property and your family’s financial future and security are at risk, an insufficient life insurance policy is all that stands in the way of you and peace of mind. Getting a life insurance policy is serious business; making sure the life insurance policy offers all the necessary coverage is even more serious. Adding life insurance riders to your policy ensures the peace of mind you may crave. It's easy to figure out the costs of your policy with additional riders by simply requesting a few free life insurance quotes. Make sure your agent is willing to give you insurance quotes that include the difference in cost if you mix and match riders.
Accidental Death Benefit
When added to a life insurance policy, this rider secures an additional amount of money to be paid to the beneficiary/beneficiaries if the policyholder dies as a result of an accident. Often referred to as “double indemnity,” this life insurance rider usually doubles the amount of the death benefit.
Waiver of Premium Rider
This life insurance rider waives the responsibility to pay the premium if and when the policyholder becomes disabled, during the length of time the policyholder is disabled. Premiums must be paid, but if the insured has become disabled and suffers from loss of income as a result, the waiver of premium life insurance rider will guarantee the active status of your life insurance even if the premiums are not paid. A similar life insurance rider that is especially beneficial is the disability income rider, which secures a monthly income should the insured become permanently disabled.
Accelerated Death Benefit
This life insurance rider allows the insured to collect either all or a portion of their life insurance policy while they are alive. The insured can claim this rider if he/she is diagnosed with a terminal illness, requires long-term care or admission to a nursing home. With these conditions, the insured would most likely be unable to continue work and earn an income. This life insurance rider can help relieve some of the financial burden and medical costs.
Family Income Benefit Rider
This life insurance rider provides a continuous monthly payment to your beneficiaries in the event of your death. Rather then receiving one lump sum, your beneficiaries can receive the death benefit in monthly payments, which means a reliable source of income. When adding this life insurance rider, the insured (you) chooses the length of the term you would like to provide this income security.
Though the life insurance rider are recommended and most commonly added to a policy, that doesn’t mean you absolutely need each one. For every policyholder and their family, the choice of which life insurance riders are needed differs.
Family/Child Benefit.
This rider allows for other family members to be insured when the policyholder is issued a policy. Through this rider, additional policies that are issued for family members are usually term policies that may be converted to whole life policies at a later time.
