Whole life insurance is a type of life insurance. It offers coverage your entire life, regardless of how old you get or your health conditions, as long as you pay your premiums. What are premiums? The premium is the amount you pay your insurance company for your whole life insurance policy.
Here’s how whole life policies work, you pay your premiums, and in return the insurance company pays your beneficiaries a lump sum on your death. No tax is charged on the death benefit. The death benefit is also called face value. You can nominate family members, friends, loved ones, etc. as beneficiaries. There is no limit on the number of beneficiaries.
The purpose of the death benefit is:
· Income replacement for your dependents
· Paying off debts, loans, mortgages, etc.
· Paying for funeral and burial costs
Whole life insurance also builds up cash value. What is cash value? From the premiums you pay, a small amount goes to a separate account, the cash value accumulates here tax deferred over the years. Though it takes decades to build up, it can be very useful. If in the future if you are unable to pay your premiums, you can borrow from it. It can also be used if you are ever in a financial crisis. But you need to remember that once you borrow from the cash value, you are charged interest from the first day. If you do not pay it back, it is reduced from the death benefit. The cash value remains with your insurance provider after your death. The beneficiaries only get the death benefit. If you want your beneficiaries to get the cash value as well, you need to purchase a rider that specifies that.