Life Insurance
Life insurance is a contract with an insurance company. There are many different types of life policies like whole life, term life or universal life. Premiums are paid to the insurance company and, in all but whole life, are exchanged for a lump sum payment. This lump sum payment is referred to as a death benefit and is paid to the beneficiaries upon the insured’s death. Most people think whole life insurance is the same as investing. We will be discussing whole life vs. investments.
How Whole Life Works
Whole life is a slightly different type of life policy. It is one of the most common insurance policies sold in America. Whole life covers the policyholder from purchase until death. This policy typically cannot be canceled until death. This entails that the policy cannot be taken away if the insured party gets sick or overly ill. Whole life is set up like a savings account and pays a low-interest rate. Each time a premium is paid, part of it goes to the insurance policy, and the other part goes to the interest-earning savings account. This interest rate can build up a sizeable cash value over time. A whole life investing account is free of income tax. The money is only taxed when it is withdrawn from the investing account. Because of these extensive benefits, a whole life plan has very hefty premiums.
Whole Life vs. Investments
Investments can include a variety of different things. Some investments are stocks, mutual funds, or real estate. Investments are much riskier than a whole life policy, but the expected rate of return is much higher. Not all investments end up being worth their investments. Many of them lose the shareholder’s invested money. Whole life insurance is incredibly stable, but there is not always as much reward included. The return on premiums in terms of cash value is very low when compared to other investment choices such as a 401K, or Roth IRA.
Life Insurance Questions?
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