Single Premium Whole Life Definition – The two most common types of life insurance are term and whole life. Whole life insurance is a form of permanent life insurance that lasts as long as you live (assuming you pay the policy premiums). It also includes a cash value account—a type of savings account that grows tax-free over time and that you can withdraw or borrow from as long as you live. Permanent life insurance, on the other hand, only lasts for a certain number of years (term) and does not bring any cash value. If you are not sure where to buy these policies, you can choose a term or whole life insurance policy from one of these top life insurance companies.
Term life insurance is perhaps the easiest to understand as it is simple insurance with no savings or investment component. The reason you buy an insurance policy is the promise of a death benefit for your beneficiary should you die while it is in force. For many people, this is a way to ensure that their minor children are provided for and that their mortgage is paid after they die.
Single Premium Whole Life Definition
As the name suggests, this basic form of insurance is only good for a certain period of time, be it five, 20 or 30 years. After that, the policy ceases to be valid.
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Because term insurance policies offer basic coverage with finite duration, they tend to be the cheapest type of life insurance, often by a large margin. If all you are looking for from a life insurance policy is the ability to protect your family when you die, then term insurance is probably the best fit.
Because insurance policies are usually more affordable and can last until your child grows up, life insurance could be an especially good option for single parents who want a safety net for their child if they die.
According to data compiled by more than 30 insurers, the average monthly premium for a 42-year-old man in excellent health applying for a 30-year policy with a $250,000 death benefit is $33.24 per month. For a comparable female candidate, this is $27.31.
Various factors will of course change the price. For example, a higher death benefit or a longer length of cover will certainly increase premiums. Also, most policies require a medical exam, so any medical complications can also push your rates above the norm.
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As the insurance expires eventually, you may end up spending all that money for no other purpose than peace of mind. You also can’t use your life insurance investment to build wealth or save on taxes like you can with other types of insurance.
Whole life insurance is a form of permanent life insurance that differs from term insurance in two key respects:
Most whole life policies are “level premium”, meaning you pay the same monthly interest rate for the life of the policy. These premiums are divided in two ways. One part of your payment goes towards the insurance component, while the other part helps build your cash value, which grows over time.
Many providers offer a guaranteed interest rate, although some companies sell participating policies that pay non-guaranteed dividends that can increase your total return.
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Typically, your cash value does not accrue until two to five years after coverage begins. But when that happens, you can borrow or withdraw an amount of your cash value that grows on a tax-deferred basis. For example, you may want to take out a loan to pay for expenses such as college tuition or repairs to your home.
The advantages of secured loans over other types of loans are that there is no credit check and the interest rate can be lower. You also don’t have to repay the loan, but you’ll reduce your death benefit as a result. Withdrawals are generally tax-free as long as you don’t take out more than you paid into the policy.
The ability to withdraw or borrow from a whole life insurance policy is a much more flexible financial tool than an insurance policy.
Unfortunately, death benefit and cash value are not completely separate functions. If you take out a loan from your policy, your death benefit will be reduced by the appropriate amount if you don’t repay it. For example, if you take out a $50,000 loan, your beneficiaries will receive $50,000 less, plus any interest due if the loan is still outstanding.
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The main disadvantage of whole life insurance is that it is more expensive than an insurance policy – by a lot. Permanent policies cost an average of five to 15 times more than term insurance with the same death benefit. For many consumers, relatively high costs make it difficult to keep up with payments.
Another potential disadvantage of whole life insurance is its complexity. With a term policy, for example, you can simply stop paying if you no longer need or can no longer afford the insurance. However, depending on your carrier, term life policyholders may face significant surrender charges if they choose to surrender their policy. Normally, this charge diminishes over the years until it finally disappears.
So which type of cover is best for your family? If long-term coverage is all you can afford, then the answer is simple: basic protection is better than none.
The issue is a bit more complicated for people who can afford the significantly higher premiums that come with a whole life policy. If your goal is to save for retirement, then many fee-based (that is, fee-free) financial advisors recommend turning to 401(k)s and Individual Retirement Accounts (IRAs) first. After increasing these contributions, a cash value policy may be a better option for some people than a fully taxable investment account.
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Some consumers have unique financial needs that a whole life policy can help manage more effectively. For example, parents with disabled children may want to consider whole life insurance because it lasts your entire life. As long as you continue to pay premiums, you know that your children will receive a death benefit from your policy even when they are adults.
Whole life can also be a valuable tool in succession planning for small businesses. As part of the purchase and sale agreement, business partners will sometimes take out whole life insurance for each owner so that the remaining partners can buy the deceased’s ownership interest in the event of their death.
Regardless of the type of insurance policy, premiums will be lower the younger (and healthier) you are when you take it out.
This is an age-old question in life insurance. The answer is that it depends on your needs and wants.
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If you only need life insurance for a relatively short period of time (for example, only if you have minor children to raise), long-term life can be better because the premiums are more affordable.
If you need permanent coverage that lasts a lifetime, whole life is probably the preferred option. Whole life also offers many lifetime benefits that come from accumulating cash value that you can borrow or withdraw during your lifetime.
Typical lifetimes are 10, 15, 20, 25 or 30 years. A small number of insurance companies will also offer 35- and 40-year policies.
If your term life insurance policy ends, the policy will generally just expire and you don’t have to do anything. However, your insurance company may allow you to convert part or all of your policy into a permanent policy. You’ll need to check this option as early as possible in the life of the policy, as sometimes life replacement is only available in the first few years of the policy.
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Whole life insurance, with its cash value component, definitely offers more financial flexibility than term life insurance. However, because permanent policies are more complicated and expensive, many consumers follow the old axiom “Buy the term and invest the rest.”
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