Is Whole Life Insurance A Rip Off?
Presented by Brokers Alliance with guest co-host Bobby Samuelson
What is Whole Life Insurance? Is it a rip off, or a benefit I need for my estate plan, retirement plan, or business insurance needs? The hosts will answer those questions and also determine if whole life insurance stands up to other Permanent Insurance policies and even Term Insurance.
Whole life insurance, sometimes called permanent insurance, or ordinary life, is designed to stay in force throughout one’s lifetime. As long as the policy owner meets his or her obligations under the policy, the policy remains in force, regardless of any changes in health that may occur. Unlike term insurance, where premium payments generally increase, as the insured gets older (the chance of death increases with age), premiums for most whole life policies remain level. A portion of each premium payment is set aside to earn interest. Over time, a whole life policy will develop cash values. The accumulated cash values form a reserve which enable the insurer to pay a policy’s full death benefit, while keeping premiums level.
During life, many whole life policies have provisions to borrow a portion of the accumulated cash
value. If a policy is terminated without the insured dying, there are various surrender options for
the cash value available to a policy owner.
Policy loans: Almost all whole policies permit the policy owner to borrow a portion
of the accumulated cash value, with the insurance company charging interest on the loan. The rate
charged to borrow the funds is often lower than current open market rates. A policy loan will
reduce the death benefit payable if the insured dies before the loan and any interest due is repaid. A policy loan will also reduce the cash surrender value if a policy is terminated. If a policy lapses or is surrendered with a loan outstanding, the loan will be treated as taxable income for the current year, to the extent of gain in the policy.
Policy dividends: Whole life contracts classified as “participating” offer the possibility of policy “dividends.” Such policy dividends are not guaranteed, and represent a return to the policy owner of part of the premium paid. A dividend may be taken as cash or a policy may offer a number of other ways the dividend might be used:
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