Whole life insurance
What is whole life insurance?
As the name suggests, this policy covers you during the whole of your life as opposed to a term policy which only covers you for the fixed period of years.
Why buy a whole life insurance policy?
In theory, you can take out back-to-back term policies. The problem in the real world is your health may slowly start to fail as you age, so what was affordable as a young man becomes more expensive when you get quotes for a second or third policy. But once you buy a whole life insurance policy, the insurer cannot cancel the policy no matter how bad your health gets. So long as you keep paying the installments as they fall due and avoid breaching any of the other terms of the policy, you remain covered during the whole of your life.
Is the amount payable guaranteed?
You should always read the terms of a policy before you buy, but the face value or minimum amount payable is almost always guaranteed. This is reason why the premium rate is higher than for a term policy.
Can your dependents get more than the guaranteed minimum?
Again this depends on the wording of the policy. The face value is almost always guaranteed but, in many cases, there is an investment element which builds up a cash value. This goes into a tax-deferred account and can be used to pay out an additional sum on your death.
Can you draw on the cash value during your life?
All policyholders have the right to cancel the policy and, in most cases after a minimum number of years has passed, this entitles you to recover the surrender value, i.e. some or all of the cash value. In some cases, the policy can allow you to borrow the cash value or to use it as security for a loan.
Is a whole life insurance policy good value?
The problem with investments over such a long period of time is whether you could have done better by investing in, say, the stock market. By tying up your money for a long period of time, you lose the opportunity to try other investments. It can be better to buy a policy that converts into an annuity when you reach a trigger age. This pays you a regular income during your retirement.