Is Whole Life Insurance Right for You?

Whole life insurance plays a valuable role when it comes to estate planning. But is it right for you?


Life insurance is a type of insurance that protects those that depend on your income for financial support. In the event of your death, a life insurance policy will help compensate for the loss of your income. Life insurance can help your family cover your funeral expenses, pay off any outstanding debts, and continue to live comfortably even in your absence.

Basic Types of Life Insurance

There are two basic types of life insurance – term and permanent. Term life insurance provides coverage to your beneficiary at the face amount of the policy only during the term of the policy. For example, the 20- year term policy might pay a death benefit of $250,000 to your spouse if you pass away during the term. Term life insurance benefits are only paid if you pass away. Once the term policy expires, neither you (the policyholder) or your beneficiary receives any benefit from the policy.

Whole life insurance is a type of permanent life insurance that lasts until death or age 100 (120 in some cases) and combines a term life insurance with an investment. Whole life insurance has higher monthly premiums than comparable term life insurance policies because of the investment component as well as commissions and fees paid to the insurance agent. A portion of your monthly premiums goes toward the cost of insurance while the rest is placed into an investment. Your investment grows and accumulates into a cash value that you can withdraw or borrow against. Note the cash value of the policy is different from the face value, which is the amount of insurance you purchased.

Since whole life is a permanent life insurance policy, you’ll continue to make payments on the premiums throughout your life. Unlike some term life insurance policies, your premium payments will be the same every month.

Who Needs Whole Life Insurance?

While there is a lot of advice against purchasing a whole life insurance policy, there is a benefit to those who purchase these policies for estate planning purposes. If you have a large estate, it’s subject to taxation by the federal government. In 2009, you’re estate is tax-free up to $3.5 million. After that, 45 cents of every dollar goes to the federal government.

Considering homes, retirement accounts, small businesses, death benefits from life insurance, and other assets, it isn’t that hard to have an estate that’s valued at more than $3.5 million. Furthermore, we don’t know what estate taxes are going to look like in the future. The taxation threshold could be raised or lowered. The taxation percentage could increase or decrease. The best option is to protect your family against high estate taxes, with a whole life insurance policy, for example.

Whole Life Insurance and Estate Planning

Let’s assume, for example, that you have a $10 million estate. When you pass away, your estate would be subject to nearly $3 million in estate taxes. That would leave your family with about $7 million. If your estate doesn’t have enough cash to cover the estate taxes, your family would have to liquidate some assets, or use some of their own money to pay the tax bill. Of course, this isn’t something you’d like your family to worry about in your absence, so you might consider a whole life insurance policy to fund the tax bill.

Let’s say you spend $3 million on a whole life insurance policy that grows to $15 million. Your estate, including the life insurance gain of $12 million would be worth a total of $22 million. Though your estate would be subject to a higher amount in taxes, $8.3 million to be exact, your beneficiaries would inherit a total of $13.7 million. That’s nearly double what they would receive without the whole life insurance policy. Plus, the estate taxes could be covered out of the life insurance’s death benefit rather than the estate’s other assets or your family’s pockets.

Choosing a Whole Life Insurance Policy

As with any life insurance policy, you should consider the amount of insurance you need. That amount depends on your income and the people who depend on it. If you’re purchasing a whole life insurance policy for estate planning purposes, you would also consider the value of your estate and the estimated taxes your estate would owe. Finding a competitive whole life quote is rather easy these days, thanks to the internet. Make sure to get a number of whole life insurance quotes from the top insurers. This will ensure that you get a good rate from a company you can rely on. Speak with an estate planning professional rather than an insurance agent to get the best advice on purchasing a whole life insurance policy.