6 Myths of Whole Life Insurance
There are two kinds of life insurance: term and whole. These often get mixed up, and you might end up with the wrong coverage if you don’t have all the info you need. Today, we’ll focus on whole life insurance and debunk its most common myths.
Myth 1: Whole Life Is “Better” Than Term Life Insurance
It’s apples to oranges to compare one of these life insurance products to the other. Let’s start with a brief definition of both types of coverage.
Term life — This type of policy is only meant to offer coverage for a defined time period or term. Typically the term is for 10, 15, 20, or 30 years. The death benefit is only paid if the policyholder dies during the period in which the policy is in effect.
Whole life — This kind of insurance stays in effect until the end of the policyholder’s life, as long as the premiums are continuously paid. In that regard, whole life includes a guaranteed death benefit.
This guaranteed payout aspect of whole life insurance can make some people think it’s superior to term life insurance. After all, you might pay into a term life policy for its 20-year duration, and the insurer never pays out a dime.
However, the motive behind buying a term policy is to offer financial security for a period of time. Parents of young children might purchase such a policy for a period of time long enough to get the kids raised. Once they’re out of the house and through college and into their own careers, the adult children no longer need the financial security offered through their folks’ policy. Therefore, the term policy has done its good, and the policyholders can stop paying premiums.
So which is better? As you can see, the two types of life insurance can’t fairly be compared and contrasted. Each type is appropriate for customers with different motives and expectations. This is also true of other types of life insurance that should also be considered before a buying decision is made.
Myth 2: A Whole Life Policy Is Also an Investment Instrument
This is a myth with just enough truth behind it to be dangerous. Some whole life policies pay dividends, which can either be cashed out annually, used to reduce premiums, or used to buy additional coverage.
It’s also true that you can borrow against your policy or deduct the cash value that accumulates over time.
So yes, there’s an investment component to some whole life insurance policies, as your broker might be eager to tell you. But that can be a dangerous way of thinking about these policies. Various moves you might make can reduce the payout to your beneficiaries. So if the reason you bought the policy in the first place is to leave something of value to loved ones, you could be working against that goal if you use your whole life insurance policy the wrong way.
Myth 3: If You Borrow From Your Whole Life Insurance Policy, You’re Only Borrowing From Yourself
Many whole life insurance policies let you borrow a percentage of cash value. If you have a $250,000 face value policy and you borrow $5,000 against it and die before you can pay it back, well, your beneficiaries will still receive a generous $245,000. They’re hardly adversely affected.
But keep in mind that your insurer will also charge you interest on the unpaid balance. When you die, it’s not only the borrowed amount that’s deducted from the death benefit but the unpaid interest as well. And that adds up.
If you are forced to borrow against your policy, keep an eye on your balance statements, so you won’t let the accumulated interest get away from you. And pay the balance and interest back as soon as you’re able. But the best advice is to try not to use your whole life insurance policy as an investment tool or a piggy bank. That’s just not its primary purpose.
Myth 4: You Will Never Be a Beneficiary of Your Own Whole Life Insurance Policy
Some whole life insurance policies carry riders that let you cash in part of your death benefit in rare instances while you’re still alive. For example, some policies come with “accelerated benefits” riders, in which a terminally ill policyholder can collect benefits while still alive. Similar arrangements can be made for policyholders stricken with certain debilitating chronic illnesses.
Keep in mind that if you draw down the face value of such a policy, the amount taken will be deducted from the death benefit received by your beneficiaries.
Myth 5: You Can Get a Whole Life Insurance Policy Without a Medical Exam
You might get a mailer or see a late-night television commercial promoting whole life policies without physical exams. These policies are usually targeted at older adults, but they typically have a much lower payout than traditional whole life policies. Sometimes their stated purpose is to provide burial costs.
For the most part, you will be subject to a medical exam before an insurer issues you a conventional whole life insurance policy.
Myth 6: Your Beneficiaries Will Be Awarded Both Your Death Benefit and Accumulated Cash Value
When you pay your premiums, part of your payment goes toward your death benefit. But another part builds as cash value that can be cashed in or borrowed at some point. But what happens to this cash value when you’re gone? The myth is that your beneficiaries get both the policy’s face value and the unspent cash value, but this is usually not the case.
The cash value is usually returned to the insurance company. The somewhat rare exception is more expensive policies that yield both the face value and the cash value to beneficiaries. Ask your insurance agent if you wish to purchase this type of whole life policy.
Ask an InsureOne Agent to Help You Untangle These and Other Myths
Through InsureOne, you’ll find an agent who’s well-informed and eager to help you select the life insurance policy that’s right for you. Start your whole life insurance quote online, over the phone, or at one of our offices near you.