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Whole Life Insurance

How Whole Life Works

People are curious about whole life insurance. They usually want to know whether the extra premium is worth it. One cannot answer this question without explaining what whole life insurance is all about.

Let us get the big answers out in the open from the outset. Yes, you would put out more money per month, per year or in whatever manner you choose to pay your insurance.

Whole life is not a great investment as far as return on your money is concerned. The truth is that you would do better with your money in real estate or some of the more popular investment vehicles.

If you want to buy an investment plan, variable life insurance and variable universal life may fit the bill. An N.A.S.D. License is required to sell these though.

The thing we need to keep in mind though is that all whole life policies are not created equal. There are life insurance companies that will give you a return on your dollar that will make the return on your money in the bank look like a joke.

A well managed mutual fund can provide you with a handsome return on your dollar but there are some funds that will handily lose your money for you.

Whole life insurance is not a great investment but if you own a policy with one of the better managed life insurance companies you can get a pretty good return on your money over time. Here are some observations regarding the value of a whole life policy.

Whole life insurance was designed for the death benefit protection it provides. The beauty of the thing is that you cannot outlive it. Whole life is like an endowment to age 100. Let us look at how these policies work.

Whole Life Insurance Companies

There are 2 types of life insurance companies. First there are stock companies and there are mutual companies.

Stock life insurance companies tend to put their shareholders above everything else. Mutual life insurance companies have a primary responsibility to their policy owners.

Although both types of companies sell participating as well as non participating policies the policy owner who has signed up with a well managed mutual company tends to get a higher cash return on his or her money during his or her lifetime. Here is how this works.

Cash Values

Whole life policies accumulate cash values over the years. The cash value also earns a minimal interest rate. Both participating as well as non participating policies have cash values.

In addition to your cash value a dividend may be applied to your policy each year.

Dividends

As these dividends are not guaranteed the life insurance companies cannot tell you that you are definitely going to earn a dividend. The best they can do is to show you projections which illustrate how much you are likely to get if they continue performing as they are now.

I will tell you this though that some of the bigger life insurance companies have not missed a dividend payment for the past 50 or 60 years.

Dividends can be applied to your policy in several different ways.

Cash

Dividends earned through your policy can be paid to you in cash. The life insurance company will send you a check for the dividend you earned the previous year.

Premium Reduction

You may elect to use your dividend to reduce premiums. This simply means that the life insurance company will bill you for a lower premium than you contracted for if you elect this option and if your policy earned a dividend in the previous year.

Accumulate Interest

You may elect to leave your dividend to accumulate interest. When added to the cash value of your policy this can amount to a considerable sum.

In many cases the total far exceeds the total amount paid in premiums over the years. It takes quite a while, however, for this to occur though.

Purchase Paid Up Additions

One of the things that you need to keep in mind is that your whole life insurance dividend can be used to purchase paid up additions.

These are tiny fully paid up policies that just sit there and accumulate more interest. If you should elect to use your dividend you will find that your death benefit will also increase considerably over the years.

So if you own a policy and have the paid up addition option applied your family will receive considerably more than you intended upon your death.

I hope this answers a few of your questions about whole life. If you are interested in this type of policy you should find an efficiently run life insurance company with a seamless track record.

The A. M. Best Company will give you all the information you need on any life insurance company.

Take a look at this page on the advantages of owning whole life insurance.

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