Insurance World

Whole life insurance, also known as “cash-value” insurance is a basic and consistent type of permanent life insurance which remains in effect your entire life at a level premium. This life insurance is a good choice got you if you do not expect your life insurance needs to diminish over time. A portion of your premium goes into a reserve fund called ‘cash value’ that builds up over the years your policy is in affect. Your reserve fund is tax-deferred and you can borrow against it, until you withdraw it.

The premiums must generally remain constant over the life of the policy and must be paid periodically according to the amount indicated in the policy. You may also have the option of a single premium —– paying all of the premiums at once with a single lump sum. Your cash values will grow to equal the amount of the death benefit when you turn to age 100.

Although, whole life insurance is very expensive, and if you’re on a limited budget, you may not be able to afford all the insurance coverage you actually need. But the plus point is that the death benefit is guaranteed as long as premiums are met. Also death benefit will never decrease if you don’t borrow against it.

Whole life insurance policy’s returns will fluctuate with the markets and will usually follow returns available from other investments like equity mutual funds. However, if you decide to quit your policy, your cash value can be paid in cash or paid-up insurance.

Whole life insurance is most suitable for you, if you want to:

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use it as a tax and estate planning vehicle,
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accumulate cash value for a child’s education or retirement,
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pay final expenses,
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provide money for a favorite charity,
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fund a business buy/sell agreement,
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provide key person protection.

Before buying the whole life insurance, you need to think carefully about choosing your level of coverage. Too often people make the mistake of insufficiently covering or even worse, financially overextending themselves. This would be a tragic error with whole life insurance policy because defaulting on premium payments can mean policy cancellation and the loss of your entire investment. So be careful and make sure you:

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pick a life insurance policy that has a guaranteed cash value starting at the very first year,
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choose the one with the highest cash value in the very first year,
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consider “participating” insurance policies which can pay dividends, increasing your policy’s value by boosting both the total cash value and the death benefits,
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beware of any insurance policy that levies “surrender charges” when you cancel.
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if you ever need to stop paying premiums, your policy lets you use the accumulated cash value of the life insurance policy to pay the premiums, thus keeping your coverage current.

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Most people will be familiar with insurance in some form or another. We all have taken out home insurance, car insurance or credit insurance among others. Insurance contracts are long and complex documents with a lot of small print. Sometimes even a lawyer would get lost in the complexities involved in them. However, there are a few features that all insurance contracts must have in common.

All insurance contracts will cover a chance event that may or may not occur. This is the risk you are insuring against. The event may be a fire in your home, a car accident, medical costs or virtually any other event. The sole exception to this is life insurance, which covers your death. This is an event that is bound to occur, however, it is the timing of death that is uncertain here.

There must be some quantifiable economic loss. Insurers will take on risks, but they must be able to quantify and predict the loss involved. The insurance company must be able to know roughly what kind of loss will be involved should the event occur. The loss must be quantifiable in monetary terms. For example, you may be able to insure yourself for medical expenses or a new car, but not for the sadness you experience as a result of an accident.

The loss must be definite. Again, insurers must know what kind of financial risks they are taking one; otherwise they will not be able to set the price of the premium.

The loss must be significant. The financial cost of the insured risk must justify the administrative costs of the insurance contract. Suppose you want to insure a racehorse. Someone will come from the insurance company, assess the value of the horse, write up a contract stating what’s covered and what conditions you must meet, calculate the premium and issue the contract. This will be worth all the effort for a valuable racehorse. However if you wanted to insure your goldfish, it would be difficult to justify the effort involved in setting up the contract.

The loss must not be catastrophic. What is catastrophic will depend on the size of the insurer and the assets they have available. But the insurance will not be worth anything if the loss is more than the insurer could afford. For example, insuring against an earthquake will often be impossible as the losses, should the event occur, would be impossible for the insurance company to ever pay out.