If you’re in the market for life insurance, you may be attracted to whole life policies. These have a cash value that builds tax-deferred each year. But are they worth it?
Here’s a refresher course on some things you should know about life insurance.
Whole life policies – Pros
Essentially, when you purchase whole life insurance, you’re buying a policy that pays a fixed amount upon your death.
However, part of your premium is put into investments by the life insurance company, and that is used to build cash value. That cash value builds tax-deferred for each year you have the policy, meaning you can borrow against it without being taxed.
Because whole life policies offer tax deferral and the ability to borrow funds, some people will argue that these policies are superior to term life policies, which pay a fixed amount upon your death. But that may not be the case.
Whole life policies – Cons
For example, whole life policies may have higher fees than do term life policies. Moreover, the tax-free accumulation of cash isn’t as appealing today as it was when whole life policies first came into existence.
That’s because other tax-deferred investment vehicles – such as individual retirement accounts and 401(k) plans – are readily available. And they may come with lower costs and the benefits of portability.
Simple may work best
Indeed, you may find term life insurance more appealing.
As noted, it has no investment component; you simply pay a premium to buy coverage that lasts for a set period of time or until your death.
It sounds simple, and it is – sometimes simple just works best.
If you’re considering life insurance and you aren’t sure which type of policy to choose, it’s a good idea to consult your advisor, who can walk you through the options and make a recommendation based on your individual circumstances and goals.