MONEY OBEDIENCE

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A whole life insurance policy is a life insurance policy that combines life insurance with savings. It can remain in force for the insured person's whole life, hence "whole" life insurance. The payments or premiums for whole life insurance are higher than for a term life insurance policy. Whole life insurance costs more because the difference between the two payments goes into a savings or investment account at the insurance company. Over time you are accumulating a "cash balance" which will give you a certain yield depending on how this money is invested by the insurance company. At some point in the future the return you get on your cash balance will be large enough to pay the premium of your life insurance policy permanently. You will no longer have to make any premium payments.

As you may have guessed, you have no control over the way the insurance company invests your premiums. However, you also do not have to take on the responsibility of allocating your savings in an appropriate way. You also do not have the flexibility of variable premiums if you have a whole life insurance policy. But again, this could be a benefit to some people — perhaps it is easier for you to plan if your premium payments remain the same for a long time.

Whole life insurance policies can be rather complicated! There are plenty of insurance agents who are happy to help you, since whole life insurance policies provide insurance agents with a good commission. So, beware! In most cases a whole life insurance policy may not be an appropriate choice, because the returns on your savings are usually much lower than the ones you could get elsewhere. In order to keep your life insurance policy in force you need to shell out a lot of money. If you do have the extra cash, it often is a better idea to invest the money in other places than a whole life insurance policy. Buying term life insurance is another option and it will most likely fulfill your insurance needs.

The fees you pay on a whole life policy may amount to half of your first years' premium or even more, and to about 5% of all subsequent premium payments. An insurance agent gets to pocket (via his or her commission) a large percentage of these fees, which gives him or her an incentive to talk you into a whole life insurance policy. Your actual needs may not be as important to an insurance agent as the potential income he or she will get for signing you up to such a policy. Keep that in mind when you discuss whole life insurance with an insurance agent.

Whole life insurance may make sense in certain instances, especially in proper estate planning. So, rather than discussing whole life insurance policies with an insurance agent, it may be better to also discuss such policies with another type of financial professional like a financial planner or a tax professional who specializes in estate planning.

As always, if it sounds too good to be true, it probably is.