What You Should Know About Whole Life Insurance
Are you looking for a life insurance policy that does not have a defined term? If yes, then you should consider getting a whole life insurance policy. Many people are aware of and interested in this type of insurance policy but are unsure how it works. Below mentioned is all you need to know about whole life insurance.
What is whole life insurance?
This is a type of insurance plan that covers the insured until they die. The premiums and death benefits will remain the same throughout the life insurance contract. A whole life insurance plan also acts as an investment tool. A portion of the insured’s premium savings will go into a savings account that will grow tax-free at the rate set by the insurer.
However, you must keep in mind, the return on investment is much lower than other insurance policies. It is because the insurer will deduct administrative fees for managing the insurance policy.
To find out more details or if you are looking to buy whole life insurance in Brampton, please give Rai Rupinder a call today.
How does whole life insurance work?
Whole life insurance is a type of permanent life insurance. It is an insurance contract with a company whereby as long as the policy is in effect, the insurance company will guarantee the beneficiary will receive the proceeds when a claim is made. In brief, a whole life insurance policy also has a savings component alongside lifetime coverage.
A large portion of the money goes towards the insurance cost, which is the amount of money that is required to provide for the policy’s death benefit. The balance of the insurance premiums goes towards generating tax-free savings. The insured has the option to leave it untouched until it pays out or when they die, or they can access the cash when required
Pros of whole life insurance:
- Lifetime protection
A whole life insurance policy is a contract that has no end date. The insured has peace of mind knowing that their dear ones will receive a death benefit upon their death, irrespective of when they are no more.
- Same premiums throughout
In a whole life insurance plan, the premiums will remain the same throughout the life of the policy. Some whole-life plans allow the policy owners to pay off the plan early. Once completely paid off, you will not need to pay premiums, however, the policy will remain in effect until your passing.
- Builds up your cash value
The USP of a whole life insurance policy is the cash value. It is a savings account built up in your plan that grows over time. You can borrow against the cash value and in some instances use it as collateral for third-party loans.
- Tax convenience
The death of a life insurance plan is usually tax-free. Additionally, the cash value grows on a tax-deferred basis. This means that the money withdrawn will not get taxed, but the amount withdrawn should not be more than the amount you’ve already paid. If you have already maxed out your RRSP and TFSA, a whole life insurance policy is another investment alternative to consider.
- Potential dividends
A few whole life insurance plans pay annual dividends to the policyholder. When you are considering retirement, you would want to know how you will generate income during that period. One option is to reinvest your policy dividends into a plan to increase your cash value immediately.
How does whole life insurance work as an investment?
When you pay the premiums of your whole life insurance, a certain portion of it goes towards the insurance cost, and some of it goes towards administrative and sales fees, and the remaining goes towards the policy’s cash value. In the initial years of the plan, the fees and cost of insurance take up a majority of the premium, however, over time the insurance cost utilizes a major portion of your policy premium, and an increasing amount is made as a contribution to the cash value of the plan.
The cash value is nothing but an investment account inside your whole life insurance plan that will grow at a rate that is guaranteed over time. The rate of return should be more than enough that your cash value should equal the value of the plan when you turn 100, that is if you do not make any withdrawals. A simple way to think of your whole life insurance cash value is the amount you would gain in return for giving up the policy to the insurer.
In the first ten or twenty years, the cash out is insignificant, because of the cost of coverage and fees. Therefore, it is not recommended to consider whole life insurance as an investment if you are older, as there is a strong chance that you may not live long enough to see substantial returns.
If you plan on purchasing whole life insurance from a mutual insurance company, you may receive dividends as your cash value grows. Mutual insurers are ideally owned by their policyholders, and the profits will be redistributed as dividends each year.
Even though dividends are not guaranteed, reputable mutual insurance companies have consistently given them out for decades. The dividends can be taken out as cash, used to pay premiums or reinvested into your existing plan, which will increase the cash value and death benefit.
The best part of a whole life insurance policy is that the cash value of the plan will grow tax-free. Which is why many consider it a retirement account. However, keep in mind, contributions made to the whole life insurance plan are not tax-deductible.
For further information or if you are looking to purchase whole life insurance in Mississauga, or whole life insurance in Brampton, please do not hesitate to get in touch with Rai Rupinder today to request a free estimate.
