To begin with, you need to understand that life insurance falls into two very broad categories: whole and term. The basic difference between term and whole life insurance is this: A term policy is for life coverage only.
In a whole life insurance policy, as long as one continues to pay the premiums, the policy does not expire for a lifetime. As the term implies, whole life insurance provides coverage for the whole life or until the person reaches the age of 100. Whole life insurance policies build up a cash value (usually beginning after the first year). With whole life, you pay a fixed premium for life instead of the increasing premiums found on renewable term life insurance policies. In addition, whole life insurance has a cash value feature that is guaranteed. To keep a term or whole life insurance policy, the full premium must be paid.
With level premiums and the accumulation of cash values, whole life insurance is a good choice for long-range goals. Besides permanent lifetime insurance protection, whole life insurance features a savings element that allows you to build cash value on a tax-deferred basis. The policyholder can cancel or surrender the whole life insurance policy at any time and receive the cash value. Some whole life insurance policies may generate cash values greater than the guaranteed amount, depending on interest crediting rates and how the market performs. The cash values of whole life insurance policies may be affected by a life insurance company’s future performance. Unlike whole life insurance policies, which have guaranteed cash values, the cash values of variable life insurance policies are not guaranteed. You have the right to borrow against the cash value of your whole life insurance policy on a loan basis. Supporters of whole life insurance say the cash value of a life insurance policy should compete well with other fixed-income investments.
Unlike term life policies, whole life insurance provides a minimum guaranteed benefit at a premium that never changes. One of the most valuable benefits of a participating whole life insurance policy is the opportunity to earn dividends. The insurance company, based on the overall return on its investments, sets earnings on a whole-life policy. In addition, while the interest paid on universal life insurance is often adjusted monthly, interest on a whole life policy is adjusted annually. Like many insurance products, whole life insurance has many policy options.
Make sure you can budget for whole life insurance for the long term, and do not buy whole life insurance unless you can afford it. You should buy all the coverage you need now while you are younger, and if you cannot afford whole life insurance, at least get term. That is why whole life insurance policies have the highest premiums; it is insurance for your whole life, no matter when you pass on. The level premium and fixed death benefit make whole life insurance very attractive to some. Unlike some other types of permanent insurance, with whole life insurance, you may not decrease your premium payments.
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