Whole life insurance is a complicated product with a basic premise — to provide your loved ones with money when you pass away. The money you pay into a whole life insurance policy is divided into a death benefit fund and a cash value account that accrues value over time. As such, it is important to understand the myths and truths surrounding this product.
Myth #1: Payouts Only Occur Upon Death
It is a common myth that payouts only occur when the insured individual dies. However, with a whole life insurance policy, you have the ability to access that money before you die. If you have a chronic illness or become terminally ill, most life insurance policies have mechanisms that allow you to withdraw money from the death benefit to use to pay for your care and needs. Any money that is left will be paid out to your beneficiaries. This can be a means of paying for care from a life-threatening or chronic condition.
Myth #2: Borrow Free Money from Cash Value Portion
Next, many people believe that you can borrow money for free from the cash value portion you have invested in a life insurance policy. You can borrow from the cash value portion; however, you can only value up to the amount of money you have paid into the policy. Even then, the money is not free. The insurance company will charge you interest on the loan that you will have to pay back. If, for some reason, you die, and you didn't pay back the loan, the amount you still owe can be taken away from the death benefit payout that was supposed to go to your beneficiaries.
Myth #3: The Cash Value Is Added to the Death Benefit
Many people wrongly believe that their policy's cash value will go to the beneficiaries when they die. However, with most policies, your beneficiaries will only get the death benefit; they will not get the cash value amount. The cash value amount, in most cases, is paid back to the insurance company.
If you want the cash value to go to your beneficiaries, you will need to pay extra for that often. By default, the cash value goes to the insurance company as a payment for the death benefit.
A whole term life insurance policy is designed to provide your beneficiaries with payment upon your death. However, if you have a chronic or terminal condition, you can also access some of the money in your policy early. You can borrow from your premium's cash value, but you are going to have to pay that money back with interest. Finally, in most cases, your policy's cash value goes to the insurance company, not your beneficiary. Contact a life insurance company for more information.