Whole life insurance is the most common type of permanent insurance. The policy provides a guaranteed death benefit along with guaranteed cash values. Part of each premium payment is applied to the policy’s cash value account, which grows on a tax-deferred basis.
In some cases, whole life policies may also be entitled to policy dividends, declared from the insurer’s surplus, and an excess-interest whole life policy may earn an additional amount of interest after a specified period of time. Policy dividends and excess interest payments are NOT guaranteed.
Many small investors, feeling burned by the financial markets, are using permanent-life policies in place of other investments.
Individuals are able to withdraw tax-free much or all of what they put into a whole-life policy, though they must follow strict rules; if not careful, policyholders can end up owing taxes.
The policies can make sense for people who need insurance and have maxed out contributions to 401(k)s and other tax-advantaged plans, advisors say. But many buyers underestimate how difficult it can be to pay the premiums year after year, and they end up canceling their policy before they break even.
Whole life insurance is often the best long-term solution for many people. It provides life-long insurance protection, builds guaranteed cash value which can be used for any purpose via a policy loan, while cash value can be increased by dividends when declared by the company.