Some people have a resistance to becoming informed about life insurance because it seems like a tedious subject with a morbid tinge to it. The thing is that if you decide to learn enough about it to make a well-informed decision as to what’s the best for you and your family, we are talking a commitment of hours, not weeks or months. The key is to start with a broad overview of life insurance, and then to drill down to a whole life insurance explanation that will be easy to understand. You just need a good quality guide to life insurance, like the one you’re reading right now.
So the big picture. There are two kinds of life insurance: term life and permanent life. Term life can really be summed up in a sentence. For a given period, the insured person (the policyholder) pays a monthly premium to the insurance company in return for an assurance that his/her loved ones (or beneficiaries) will receive a payout of an amount specified in the policy, in the event of the death of the insured person, during the term of the policy. If the policyholder is alive when the term of the policy is over, there is no payment at all, and since amortization stats tell that this is what usually happens to term life holders, they are cheaper than the other main kind of insurance, ‘permanent insurance’, which covers you for your whole life.
The simplest kind of permanent insurance is actually called Whole Life Insurance. There are advantages of whole life insurance over term life, but as you’d guess, if it covers you for your entire life it must be more expensive. Still, some people people find it attractive because it offers the assurance that one’s life won’t be uninsured when their term life policy is finished.
But let’s look closer. A whole life insurance policy has a so-called ‘cash value’ associated with it, which is an amount that the policy builds up in value over the years, such that it will eventually be equal to the death benefit. In addition to the higher premiums you pay, the policy is also set up so that you will earn interest on the cash value. Another advantage is that you normally are allowed to borrow money against your policy’s cash value. The reality though, is that the peace of mind that you have knowing that you have coverage for your entire life, may not be worth the higher premiums.
Whole life insurance rates are higher than term rates–often the premiums you will pay are multiples of similar term coverage. What if, instead of paying the insurance company all that extra money each month as a form of ‘forced savings’, you chose conservative, diversified, very long-term investments? Miscellaneous fees with whole life insurance are often so high as to make them unattractive as investments, for most people, regardless of what an agent will tell you. Managing your money well and adding to your investment accounts in a disciplined fashion, over decades, will probably leave you with holdings that far exceed the death benefit you are diligently paying toward with your whole life policy.
There are other kinds of permanent life insurance, like variable life insurance and universal life insurance, which function better as investments, but do require some financial knowledge and even some risk. There are explained elsewhere on this site. Hopefully though, that was a whole life insurance explanation that didn’t put you to sleep, and at least gave you a basis for further exploration as to what form of coverage will work best for you.