Whole life Insurance Explained | how whole life insurance works

Whole life Insurance Explained | how whole life insurance works

I would like you to meet nick, nick is not having a good day he drove off a cliff why well i’m sure he did not plan for that he cannot truly plan for everything in life. life simply happens that’s why whole life insurance was created in the first place, fortunately, nick had already purchased a whole life insurance policy before getting into the situation he is in right now well fortunate is a strong word considering the situation so if you’re wondering about the true meaning of whole life insurance and want to know more about premiums cash value and death benefit it is crucial to stick around till the end of this article you will be more capable of taking a well-informed decision that can one day determine the future of your family since the end of world war ii in the 1960s whole life insurance was the foremost popular insurance product out there families using whole life assurance policies found financial stability and sufficient retirement funding.

When losing their loved ones people even used whole life insurance as an investment method at that point since it might secure annual dividends nonetheless in 1982 the tax equity and monetary responsibility act otherwise referred to as tefrop passed in the u.s and it had been the most important tax increase in u.s history this made people turn their attention to stock exchange which accounted for inflation on an annual basis, for instance, the s p 500 was adjusted for inflation with an amount of 14.76 in 1982 and 17.27 in 1983. unlike the insurance companies which provided rather fluctuating interest rates that did not account for inflation today 59 of people living in the us pay for life insurance it is seen as a contemporary investment tool that is protected from the potential collapse of the stock market we will be discussing this a bit more later in this video and will run the numbers to measure the effectiveness of using whole life insurance as an investment tool now let’s address the elephant in the room shall we what is whole life insurance how does it work what happened to nick and his family whole life insurance provides the insured party with some peace of mind when it comes to the continuity of their family’s financial stability and overall well-being in exchange for a level regularly paid premium payments it spans over the entire lifetime of the insured party and does not have an expiry date whole life insurance is made of three components these are premiums death benefits and cash value so premiums are what you pay every month for whole life insurance this amount is flat it does not change throughout the lifetime of the insured party in exchange for what is known as the death benefit the death benefit is received by the insurance beneficiaries which are typically the family members of the insured party yes it’s called death benefit because the policy beneficiaries receives this amount when you are dead for instance this can amount to 500 000 or some people even opt in for bigger amounts based on their financial capabilities.

When premiums paid into your whole life policy matches the benefit it’s considered to possess reached its maturity typically insurance companies design policies to mature once you turn 100 but some recent policies even extend that maturity to the age of 120. the third main component of the entire life assurance is that the cash value which is usually mentioned as a living benefit a part of the premiums you pay goes to building up the cash value which you receive dividends on this is what makes whole life insurance different from other types of life insurance such as the term life insurance during the first 10 to 20 years of coverage a whole life insurance policy’s cash value is quite small due to the fees and costs of coverage the insured party should receive around 10 dividends on the cash value only but when deducting all the insurance companies administrative fees and commissions the insured end up with dividends around 2.2 percent as reported by the consumer reports organization essentially dividends are based on the performance of the company’s financials interest rates investment returns.

and new policies sold the cash value of your whole life assurance policy won’t be taxed while it’s growing this is often referred to as tax deferred and it means your money grows faster because it isn’t being reduced by taxes each year the insurance beneficiaries in our scenario next family are only entitled to the debt benefit while the cash value may go to the insurance company nonetheless the cash value can be accessed by the insured party which is nick in case of cancelling or surrendering the policy and losing the death benefit many insurance policies feature a withdrawal clause that would allow the insured party to cancel the policy a check will be given with the amount of the accumulated cash value the policyholders can also take a loan from this cash value without taxation rather than taking it from a bank which is understood as infinite banking it’s not a loan from the cash value though you’re taking a loan from the insurance company and using the cash value you accumulated as collateral that acts as a form of protection for the insurance company the loan amount should be paid back with interest but the interest rates required by the insurance company would typically be much lower than the interest rates required by bank loans or credit cards unpaid loans will reduce the death benefit.

that is received by the policy beneficiaries so let’s illustrate what we learned here through a simple example shall we let’s say nick is 40 years old and wanted to purchase a whole life insurance with a death benefit of five hundred thousand dollars on average nick will be paying about four hundred and thirty dollars per month for whole life insurance premiums which results in five thousand one hundred and sixty dollars per year nick will only be receiving dividends on the portion of the five thousand one hundred and sixty dollars that went into funding the investment component which is the cash value of the policy this will result in 2.2 dividends as reported by the consumer reports organization this means nick will end up with dividends of a bit more than 100 per year.

So after running some numbers you can quickly see at this point that this is not the most appealing type of investment when compared to other options that may yield a higher return on investment nonetheless whole life insurance is highly recommended by many brokers and financial advisors across the us as the best possible investment tool the reason one simple word commission these advisors receive commissions between 80 to 100 of the annual premium paid by the policy holder this is a high commission since whole life insurance has an investment component and requires rather high premium payments when compared to other life insurance options so in this case nick’s advisor could receive up to 5160 dollars but don’t get us wrong there are situations that whole life insurance may be an amazing option this includes families that have an ongoing financial need having a child with special needs who requires lifetime support or even owning a sizable business or a state that generates a taxable income by now you should appreciate the fact that whole life insurance is not a one size fits all many companies in the us can provide life insurance policies including prudential financial state farm new york life and more feel free to check our video on the best insurance companies in the u.s so what do you think would you go for a whole life insurance please let us know in the comments below thank you for sticking around and watching this video i hope that this article gave you a better idea about whole life insurance.

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