Before we study the whole life insurance pros and cons, let us discuss what a whole life insurance policy entails. This is the most established sort of permanent policy to be found in the market. The ease of use as well as its stability makes it a popular alternative. Under the whole life insurance policy, you get permanent life insurance coverage throughout your life, generally till the age of 100. This policy does not lapse, provided sufficient premiums are paid each year for keeping it in force.
The premium as well as the death benefit quoted at the start of the policy remains almost same throughout. However, since the insurer invests your premiums, that policy can even accumulate cash reserves. The funds thus accumulated, may be used as premiums, saved or reinvested according to your choice. Apart from being a saving tool allowing you to create cash reserves on a tax-deferred basis, it offers stable insurance protection for a lifetime.
• The first advantage with regard to a whole life insurance is cash value accumulation on a tax-deferred basis. You may take a loan against the cash value, if you need at any point of time. You can even cancel the policy if you no longer desire insurance protection and get back the cash value. Upon death, the payment is free of income tax and the benefits can be transferred to a person outside the policyholder's estate.
• Unlike the term insurance, this policy will cover the entirety of a person's life. Thus he or she will get payment upon death, irrespective of whether death occurs at 25 or 90. Term policies expire after a definite time period. It can be renewed, but the premium cost will increase. However, the whole life policy premiums remain level so long the policy is active.
• The premium amounts to be paid at definite intervals bring in the forcible habit of savings in people, which prove to be advantageous in the long run. Whole life insurance policyholders can budget the premiums over a lengthy time period, thereby reducing the possible risks of the coverage not being within your means.
Some of the drawbacks associated with whole life policies are the following:
• As chances of death increases every passing year, the cost of this policy becomes higher. Many families will find this a costly affair and may turn to a cheaper alternative like a level term insurance.
• While a whole life policy may be a lifetime investment, the cash-in value turns out to be quite low as compared to different alternatives. Although there are guaranteed returns, it is seen that stock markets historically have brought about higher returns.
• Not all persons require a policy of this sort. Many individuals have bought wrong policies with coverage that is inappropriate for them.
• There is no scope for improving the returns by investing in bonds or stocks as the whole process is managed by the insurer.
To sum it up, a whole life insurance policy is not the perfect solution for everyone. It may so happen that you require the coverage till the time you have to handle the mortgage loan or your child's education is completed. In such a case, a critical illness insurance or level term insurance might prove to be more useful.