Committing to a life insurance policy can be difficult, especially with so many types of life insurance to choose from. In fact, fewer than half of American adults ages 25 to 64 have a policy, according to life insurance research firm LIMRA. But sometimes you have even more decisions to make once you’ve decided to buy — especially if you’d like to purchase a permanent policy, such as whole life insurance.
Whole life insurance pays out a death benefit no matter when you die, as long as you’ve kept up with premium payments. Policies typically offer level premiums and a savings component. You may take loans from this cash value, but it will reduce your death benefit if you don’t pay them back. These policy perks do make whole life insurance more expensive than term. For example, while a 35-year-old woman would pay about $35 per month for a $500,000 term life insurance policy, she’d pay over $300 per month for the same amount of whole life insurance, according to Trusted Choice, a trade group for independent agents.
Four key questions
Although whole life insurance can be hard to understand, it might still be the best choice for you. Many advisors recommend it to those who have large estates, own businesses or have maxed out their 401(k)s and IRAs. And if you do pick a whole life insurance policy, you’ll still have to make the following choices.
- How much protection do you need? One of the most important questions when choosing any life insurance policy, whether permanent or term, is how much coverage you need. A life insurance agent can help with this decision, or you could try some of the many free life insurance calculators online. However, picking a level of whole life insurance may be a bit more complicated than estimating your mortgage interest and your children’s education costs. Do you want to leave something extra for your heirs? Will you be taking loans to fund your retirement? These and other uses might require a larger death benefit.
- Do you want dividends? If you choose a whole life insurance policy that pays dividends — also called a “participating policy” — you’ll receive money back if the company does well. You may receive dividends in cash, use them to pay premiums or to increase the face amount of your policy. Keep in mind that dividends aren’t guaranteed and not all insurers offer dividends.
- How do you want to pay premiums? Whole life insurance policies often offer level premiums, but you do have a few other choices. You can opt for an adjustable-rate policy, you can pay premiums for a limited number of years or you can pay in one large lump sum. If you pay over a shorter time period, premiums will be more expensive.
- Do you need any riders? Riders are extra benefits you can add to your policy for an additional cost. For example, an accidental death benefit rider pays extra if you’re killed in an accident. Other riders, such as a critical illness rider or accelerated death benefit rider, can pay out early to help with medical expenses.
If anyone depends on your income, life insurance is a must. And if you have a large estate or other unusual circumstances, whole life insurance might be your best bet, despite the expense — and the complication. Before you agree to a permanent policy, do your research. Then make an appointment with a licensed agent, who can ensure that you’re getting the best deal and that you understand what you’re buying.
Alice Holbrook is a staff writer covering insurance and investing for NerdWallet.
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