With the decline of the 401(k), many Americans now worry about how they’ll pay their bills after retirement. With so many Americans having no retirement savings at all, many also wonder what will happen to their bills and families after they die.
There are many financial products available to help you protect your family’s finances as you get older. One of these is whole life insurance. And if you buy whole life insurance while you’re young, it can work in your favor for decades.
What is whole life insurance, and how does whole life insurance work?
What Is Whole Life Insurance?
A whole life insurance policy is what most people think of when they think about life insurance.
It’s a type of policy that covers you starting the day you sign the contract until the day you die. When you pass, your beneficiaries receive a payout of the value of your policy. Your beneficiaries may use it whatever way they see fit, including to pay bills, pay off debt, or as a nest egg for retirement.
Your policy also generates a cash value as you contribute to it over time.
Usually, whole life insurance is much more expensive than term life, which only covers you for a set period. However, if you buy it while you’re young and healthy and you have the cash to make a reasonable investment, you can get an excellent policy that you can not only count on if something happens, but you can also borrow from if times get tough.
How Does Whole Life Insurance Work?
So how does whole life insurance work? Essentially, it provides you a set amount of coverage for your entire life, as long as you pay your premiums.
Beyond this, the answer depends on your policy, but let’s talk about one of the primary benefits of whole insurance: the cash value.
When you pay your insurance premium, a portion of your payment goes towards a savings account that contributes to your cash value. Your insurer uses that money to invest, and you enjoy tax-free earnings on it until you withdraw it.
The cash value is significant because you can use it later in life. You can borrow from your cash value or use it to pay your policy (eventually). However, anything you borrow and don’t repay ultimately reduces your benefit. Keep in mind that you do need to pay tax on the amount you withdraw.
Don’t worry: the death benefit is tax-free.
Is Whole Life Insurance Right for You?
Whole life insurance is a viable investment option for young people who don’t have investment options like 401(k)s and pensions.
How does whole life insurance work? It provides you with coverage for your entire life, including both a death benefit and a cash value that you can borrow against. Whole life policies are also tax-efficient when managed correctly, which simplifies investing.
Would you take out whole life insurance? Want to learn more? Find more financial advice for small business owners in the archives.