Whole life insurance is the most common type of permanent life insurance that protects policyholders for the duration of their lives.
As long as premiums are paid, whole life insurance policies offer a guaranteed death benefit. Like most permanent life insurance policies, whole life insurance has a cash value component that can grow over the policy’s life.
When a policyholder pays the premiums, a portion goes toward the cash value component, helping it accumulate over time. Therefore, it can act as an emergency fund for the policyholder. It is important to note that this is considered a loan as interest will be accessed for these funds.
If there is a need for cash, the insured can take out a loan against the policy or withdraw funds. If a loan is unpaid at the time of death, it will lower the death benefit for beneficiaries.
Although the cash value component and lifelong coverage seem appealing, whole life insurance is unaffordable for many people. But some situations make these policies alluring.
A whole life insurance policy, for example, can be used to fund a trust and provide support to dependents upon the policyholder’s death.
A policy also could be used to pay estate taxes for the wealthy. For individuals who have estates that exceed the current estate tax exemption (IRS guideline for 2020), nearly $11.6 million, the policy can pay the estate taxes when the policyholder dies.
Other forms of permanent life insurance may meet these needs as well.