Traditional whole life insurance is a life insurance plan offering lifelong coverage to policyholders. It incorporates a savings element that accumulates cash value over time, dissimilar to term life insurance, which only provides coverage for a designated period.
On the event of the policyholder’s demise, the insurance payout is transferred to the policy’s beneficiaries, offering them financial support. These policies also feature an investment component that gathers a cash value that the policyholder can withdraw or loan against when they need funds.
The policyholder is assured of a specific amount to pass on to their beneficiaries regardless of their lifespan, provided the contract is maintained. Most policies incorporate a withdrawal clause that allows the policyholder to cancel their insurance coverage and receive a cash surrender value.
Paying regular premiums on a traditional whole life policy enables policyholders to accumulate wealth as these payments cover the insurance costs and contribute to the savings account's equity growth. Interests, or dividends, can accrue in this account (tax-deferred).
Whole life insurance policies tend to cost more than term life policies. Between 1940 and 1970, whole life insurance was widespread as it provided income for the insured’s familiea in case of untimely death and assisted in retirement planning.
However, after the enactment of the Tax Equity and Fiscal Responsibility Act (TEFRA) in 1982, many banks and insurance companies became interest-sensitive. People began questioning the merit of investing in whole life insurance over the stock market, where return rates ranged between 10% to 12%. Consequently, most people turned to the stock market and term life insurance.
Whole life policies offer a living benefit and experience cash value accumulation, which can be borrowed against or withdrawn. However, withdrawals are taxed at the ordinary tax rate, and if loans remain unpaid at the time of death, the beneficiaries will receive lower death benefits.
Contrarily, term life is a temporary insurance plan that provides life insurance for the policyholder and only provides a death benefit. While whole life insurance offers lifelong coverage, term life insurance has a specified period during which the premium remains stable. Ultimately, the premium increases annually until it becomes unaffordable, or the policy is terminated.