What Are The Advantages Of Whole Life Insurance

The advantages of whole life insurance are plenty. It is an easy, lucrative sell for the insurance agents and companies. Through years of hard work, the industry even got governments to create some legislation and legal definitions that make their products sounds good. Customers, please take notes of this because advantages for the sellers could be disadvantages for the buyers.

The Forced Saving Advantage!

I know that many people cannot keep money around. As soon as they have access to any amount of money, they spend it all so quickly that they don't even know where it goes. If you think you are one of those people, then the forced saving function of whole life insurance isn't for you because there are just many other better ways to help you keep your money and have your money working for you too.

The so called forced saving lies within the cash value feature of the life insurance policy. Insurance companies heavily advertise it and insurance agents are trained to emphasize it because cash value sounds very good and it puts your money into their hands. Some of that money will go to agent's commission, and the rest end up in the insurance company's cash stash, and thus the appropriate name: cash value.

If you just check your policy out for a few minutes, and quickly find the relevant page that talks about your cash value, what it really says is that you can borrow that cash value one day if you go through financial hardship.

If you borrows that cash value, they will charge you interest for it. If you fail to pay it back and can no longer afford the premium cost (for more than 3 months usually), then the policy lapses. You will still owe the company money, if the "cash surrender value" is smaller than your cash value and interest cost combined.

The cash value can be called your money by the agents when they try to sell you, because it is legal. The definition for insurance cash value is even in the text book for insurance licensing exams for provincial governments. (Canada or US) It has the advantage of making prospective agents think it's such a good feature too.

Tax Advantage

If anything happens to you and you die, the death benefit is tax free. Did I mention that your cash value is also tax free?

Guess what? Oxygen is tax-free. Unearned money is tax free. After tax money is also tax free!

One thing you might want to know is that, all death benefits from life insurance is tax free if your insurance policy is paid by after-tax money. Therefore, death benefit of term life insurance is also tax free. Not so for life insurance that is paid by before-tax money.

Cash value is just money that is no longer yours, and the amount you can borrow is subjected to limit. It won't earn any money for you. Unearned money is tax-free!
Legal Advantage

In lottery, 99.999% people lose, but in whole life insurance, everybody wins. People will eventually die and they will eventually get the death benefit. For term insurance, the payout rate is less than 1%. What? Just 1%? They expect you to survive and enjoy your retirement! But whole life insurance expect to lock you in for life!

And there is dividend. Insurance dividend has a unique definition. The industry managed to create this definition and put it in the book of insurance legislation (Canada and US). Insurance dividend is a refund of excessive premium charge. If you buy any product from any merchants, they charge you and there is no more refund if you are satisfied with the product, and they know their profit margin right from the beginning.

For insurance, however, they don't know if they are going to lose money if too many insureds die at an earlier stage, or if they are going to experience financial hardship, so they charge you a lot to create a buffer for themselves, so after years of investing your money and earning some extra profit, they may choose to give back some of your money and call it dividends. They keep the gain of course.

Your dividend is usually tax-free, because it is not a profit. It is a refund of your after-tax money. They may give you some mild interest because they have borrowed your money for so long, and the government will tax that interest should they give you any.

Insurance agent will get annual referral fee from a whole life policy. It is a lifelong passive income. The agent doesn't need to do anything. The income is automatic. If he sells certain amount of life insurance, he is set for a comfortable retirement! This is just one of many advantages. And there is up sell and cross sell opportunity.

Every time you get a promotion or windfall, a good insurance agent should hear about it and come to knock on your door to do one of these things: increase the amount of coverage, the number of policies for your household, and fancy riders (add on features for insurance) that have good names. This is up sell.

And cross sell, because he would also try to get your children insured as well. There are many wonderful insurance products that target children even though they have no income to protect at all. It always sounds good to get your children to save money from a young age, so not only will they try to sell whole life policy to your children, they will also sell your children newer types of insurances such as universal life insurance and variable life insurance. Everybody has different needs right?

Simple, but challenging. It's challenging because your agent will tell you that your case is unique, that there is no one-size fit all solution, so it's unwise to cancel your policies and to buy term life insurance just because you read this article. But this one simple act can save you hundreds, if not thousands of dollars per year.