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Whole life Insurance

So we’ve covered Term, now let’s go over Whole Life policies.

In Whole life insurance, you pay a “fixed premium” for a “fixed coverage” amount. Both of these numbers are supposed to never change as long as the policy stays in effect. The costs of these policies on average can be up to 10 times that of Term policies of the same face value.

One reason for this is expense is that these policies are not just life insurance, but also act as an investment vehicle. A portion of your premiums each month go to investment accounts that the company sets up to earn income. A portion of the income is credited to them and a portion to the “cash value” of your account. Regardless of your age when you purchase, the cash value should be equal to the face value of your policy if you reach 100 years of age. That is one of the factors that determine your premiums to begin with.

Another reason for the higher cost is the length of your life. This insurance will be in force until you die, or reach 100 years of age. As you get older, you are more likely to die and hence the cost to cover you goes up for the company. Whole life generally overcharges you about 30% when you sign up so that as you age, the cost of your ever increasing risk is still covered.  So, your costs don’t go up and they keep a healthy profit margin, win – win.

It is highly suggested by every non- insurance industry professional and even some of those to, that it is a bad idea to use whole life insurance as an investment vehicle alone. If you do not need the face value of the policy, you should not purchase this product.

For more on this topic I suggest reading this article from Smart Money magazine, or for a more concise version you can ask Financial “guru” Dave Ramsey.

-Jared

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