Consumers can choose between two basic types of life insurance: term and whole life. Term insurance covers you only for a set period, while whole life provides coverage until you pass away. Some whole life insurance plans allow you to pay extra in premiums to build a cash value for the policy, which the insurance company invests for you. Because term insurance doesn't offer a cash value investment option, people usually use whole life insurance as an investment tool. Doing this has four main advantages, including a guaranteed payout, care of your loved ones, care of the policy holder, and tax deferment.
Unlike most investments, a whole life insurance policy has a guaranteed payout. You cannot guarantee you'll get the cash value of the policy back, depending on how you've chosen to invest, but you know you will get at least the face value of the policy. This guaranteed payout makes whole life insurance one of the safest investments available. It means you can plan with some degree of surety for the future.
Care of Loved Ones
A typical no frills funeral costs about $6,500, according to the National Funeral Directors Association. Additionally, other costs are associated with passing away, such as fees to file paperwork to transfer property via probate. Many people also die with debts. If you don't have life insurance, your estate covers debts before your heirs receive anything. Life insurance can cover your funeral and all associated costs, as well as outstanding debt so that your loved ones will not be burdened. If the value of your policy exceeds the cost of your funeral, related expenses and debts, then the beneficiaries can use the remainder of the payout for virtually anything, including education or buying a home.
Care of Policy Holder
Life insurance doesn't just protect your loved ones -- it protects you as the policy holder, too. It is possible to withdraw from the account into which your insurance company has placed your extra premium payments. In this way, the cash value of your life insurance policy is like an extra savings account. If you need money before you pass away, the cash value of your policy might cover your costs.
Similar to other investment options, the cash value of a whole life insurance policy is tax-deferred. Laws in place at the time of publication work such that the higher your tax bracket, the more valuable is the benefit of your tax deferment.
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