Every insurance company offers numerous life insurance policies, and sometimes choosing the best one can be tricky. First, you must select between permanent and term life insurance before you even get to the benefits of whole life insurance.
The permanent life insurance policy popular in the States is whole life insurance. The whole-life is one of the best permanent life insurance policies because it offers stability and coverage for the entire lifetime, as long as you pay premiums.
But there’s much more to it. Let’s explore all the advantages of whole life insurance and why you should buy one.
When you have a whole life insurance product, you are signing a contract between the insurance company and yourself. This is a private contract, which means you are in complete control.
With different products, you don’t necessarily have control over what happens with your account and how you can best manage it. With a whole life insurance policy, however, you gain complete control. You can access it to your heart’s desire—without paying fees or facing any issues.
Keep in mind that you don’t lose money until you lose control of it. The nice thing about a whole life insurance contract is that you maintain control throughout your life.
With whole life insurance policies, the premium payments never change. With the fixed premium, you get lifelong protection, whereas additional benefits start showing up after a few years of owning a policy.
At the very beginning, the premiums paid can be deemed high compared to the term life policy, but because they are fixed, they will feel much more affordable over the long run.
Having required premiums that are fixed is much better than having premiums that are increasing because you get the stability that will help you improve your overall financial situation.
The long-term coverage you get from a whole life insurance policy is invaluable. The only condition for your policy to remain active is to maintain the timely payment of premiums, and if the policy owner stops paying premiums, the whole life policy lapses.
In other words, your policy will expire, but some insurance providers offer the possibility of continuing to pay. In this case, you will likely have to undergo a medical exam or answer questions about your health history and health issues, but check if this is even an option.
If not, you can either cash out your policy or opt for the “reduced paid-up” option. The latter means you will receive a reduced death benefit without a cash-saving option.
To get life insurance coverage and financial protection for you and your beneficiaries, pay whole life insurance premiums, and you’re good no matter what happens with your health later.
Cash Value Component
Not all life insurance policies have a cash value component. For example, any term life insurance policy doesn’t have this feature, and you cannot choose it if you plan on saving and investing money through your policy.
You can access your cash value in four different ways, but these two are the most common:
- Policy Loan
But here’s something you may not have known: If you access the cash value through policy loans, you don’t disturb the compounding inside the policy. In other words, your cash value keeps growing.
This is the non-guaranteed portion of your contract premium, which is the dividends paid to you. As long as you work with a mutual insurance company and take care of the monthly payments, you might get yearly dividend payments.
What are dividends?
At the end of the year, when the insurance company is profitable, and they’ve paid all their expenses, whatever is left is returned to the policy owners in the form of a dividend.
We call that return a premium. The IRS does not tax you on these dividends – another bonus point in favor of whole life insurance.
And the best thing about it is that you don’t have to do anything to get dividends. All the owners of whole life insurance policies become eligible to receive dividends as long as the insurance company is profitable.
This is just one of the great benefits of whole life insurance policies and something you don’t get with a term life insurance policy.
Riders are additional features and benefits that can be added to your policy for your specific needs.
For instance, if you add a terminal illness rider and you’re diagnosed with a terminal illness, a portion of your death benefit can be utilized to cover your medical expenses. This is similar to a chronic illness rider, both of which give you benefits you can use while you’re still alive.
There are so many different riders you can explore. They will allow you to determine how your death benefit is paid to beneficiaries.
One rider we are very familiar with and use a lot is a paid-up additions rider and we’ve talked more about it here:
That allows you to add cash value inside your whole life insurance policy so you can have that cash value available in the very first year.
With a traditional whole life insurance policy, it takes a few years to build cash. That means you don’t usually see the cash value of the policy in the early years.
Because you put after-tax dollars into a whole life insurance policy, the cash value here is tax deferred. In other words, as long as you request a loan, you will not be taxed on any growth or cash value from your whole life insurance policy.
And the nice thing about adding after-tax dollars to your whole life insurance is that you know what taxes you pay now, so you can easily track all your money and not worry about being taxed later and losing almost half of it.
Buying life insurance isn’t merely to get death benefits. You can also use the policy for your retirement financial planning. The accumulated cash value can be withdrawn, and you can use that money during your retirement.
The difference between using your whole life insurance and a traditional savings account is that the whole life insurance allows you to withdraw the money tax-free. Furthermore, you can still receive the death benefit and leave some money to your beneficiaries, who can continue to build generational wealth with private family banking.
None of this is possible with the savings account.
Guaranteed death benefit
Although the policy’s death benefit isn’t the primary reason to get whole-life insurance, it’s nice to know that you get it.
The death benefit is what your beneficiaries receive upon your passing. The value they get is tax-free, but it depends on the policy you have. With whole life insurance, the death benefit is usually higher because of the significantly higher premiums.
When looking at the death benefit, you must consider burial expenses and how much you can leave to your family members to cover all the costs after you are gone. If you think the premium payments are too high for whole life insurance, there’s always final expense insurance specifically designed for this purpose.
Final expense insurance offers lower death benefits at a much lower cost, and it can be a good option for those who don’t want to burden their family members.
Option to Surrender
Even though we never advise you to surrender your policy, sometimes there isn’t another option. You don’t want the cash value of your whole life insurance to be used to pay premiums. Perhaps it is better to get the cash surrender value.
This is the cash minus surrender fees and any outstanding loans you’ve taken against your policy. If you take the cash surrender value, your life insurance policy is over, and you can’t keep it.
You’d have to start from scratch, so use this option only when there are no other solutions. Remember that if you had any investment gains that were part of the cash value, your surrender isn’t tax-free.
Use Your Whole Life Insurance Policy for Infinite Banking
We talk a lot about life insurance in our YouTube videos. If you’ve watched them or read this blog, you know we have been using whole life insurance in combination with the infinite banking concept to pay off debt, make investments, or provide a legacy for our family.
Does any life insurance work?
Since you need guaranteed growth of your cash value and level premiums, a whole-life policy is the only option. Neither universal life nor term life insurance can effectively be used for infinite banking.
How does infinite banking work?
By taking loans from the insurance company, you’re using your policy as collateral, which leaves your money undisturbed. And that means it earns a guaranteed compound interest rate.
With infinite banking, you become your own banker.
Your policy is growing at the guaranteed 4% compounded interest rate. Where else can you get that? Your savings account—or even money market account—doesn’t have that high of an interest rate.
Of course, we’re just comparing it to the banking function. We’re not talking about any of the investments you’re making.
Put it to Use!
It is one thing to know about the benefits of whole life insurance and another to build your cash value and use your life insurance to gain wealth. Once you find out exactly what you have to do to utilize your whole life insurance, you no longer have to rely on financial institutions or look for a financial professional to help you out.
Instead of spending thousands of dollars on a financial advisor, watch our free Lifestyle Banking masterclass and then join our community, where we share details of how to use whole life insurance to become your own source of financing.
We’ve applied this system and started to own our own lifestyles, and so can you!