Advantages of Whole (Permanent) Life Insurance

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Guaranteed whole life is a form of life insurance that will protect you as long as you live. If you live to age 100, you will be paid the face value. If you die before you reach 100, your beneficiary will receive the face value. 
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Whole life insurance builds a cash value. At age 100 the cash value will be equal to the death benefit. That cash value is not something you can simply take, although you can borrow against it. You can also surrender the policy early and take the cash you have built up.

Whole life insurance is not as cheap as Term insurance or even Universal. That's because you are guaranteed a level premium and a level benefit. ("Level" means never changing). It will cost much more to insure you at age 85 than it does at age 25, for example. Yet, your premium will not change as you age. Therefore, the company charges you more than the actual cost of insurance in those early years. Therefore, even though your premium will not increase as the years go on, the additional cost of coverage will already have been built into the policy.

The excess cash you pay is also invested by the company and earns interest at a guaranteed rate. This interest gives you a cash value that grows as the policy ages or "matures." This is not a savings account that you can simply take, but you can borrow against it. In fact, many companies will let you borrow against the face value itself. Keep in mind, however, that interest will be charged against such a loan. If you do not pay the loan back, your beneficiary will eventually receive the face value minus the loan. But if you do not pay the annual interest, the cash value will also drop, and the policy can lapse for "loan insufficiency."

Advantages:

• The amount you pay for life insurance usually remains the same your entire life even as you get older and your health declines.
  
  
• Your policy cannot be cancelled except for loan insufficiency or failure to pay premium.
  
  
• Your policy causes you to save money on a regular basis.
  
  
• The investment portion of the policy has cash value.
  
  
• You can borrow against the cash value of your policy.
  
  
• You can cash in the policy at any time although there may be a surrender fee in the early years.
  
  
• Premiums are lower the younger you take out the policy, making them more affordable in later years when you are relying on social security for your income.
  
  
• An option called "automatic premium loans" is usually available. This is a rider that will take a loan for the amount of the premium against the policy in the event that you are unable to make payment. This prevents an accidental lapse.
  
  
• Since the benefit goes to your beneficiary tax free, you will be providing a way to pay estate taxes or any other final expenses.

Disadvantages:

• It's more expensive than term insurance.
  
  
• You can cause the policy to lapse if you do not pay at least the interest on a loan.
  
  
• If you cash in your policy, you forfeit your insurance.
  
  
• You may not need a large death benefit after a certain age.

Buy Term Invest The Difference?

Some financial counselors advise their clients against purchasing whole life insurance as an investment vehicle. Instead they advise them to buy term life to cover the loss from death, and then to take the money they save in premiums and use it to investment in stocks, bonds, mutual funds etc.

This advice is problematic since it may not work for all people. It's a good strategy if you have the discipline to save money on your own on a regular basis and if you are in a solid growth fund that has little downside risk. However, most people fail to "invest the difference" and simply use it for additional living expenses. Then years later, when the term is about to expire or sharply escalate in premium cost, they find themselves with no insurance at all.

Purchasing whole life insurance can be difficult without help. Some companies have a policy they call "whole life" but it is not "guaranteed" whole life. Rather it is a variable whole life, based on current interest rates similar to a universal life. Such a policy may have a very low initial premium, but may be subject to period recalculation. If it is really whole life, you will not lose it if you cannot pay the recalculated premium, but you may have to settle for a “minimum” face value. It is to your benefit to speak with an agent who has been trained in the specific language used by the company.