Permanent vs. Modified Whole Life Insurance: Differences in Premium and Features to Know before Buying One

You know you need life insurance but aren’t sure what you can afford. Whole life insurance is a permanent life insurance policy that many people want but can’t afford the premiums, so they turn to term life.

Depending on your situation, though, term life isn’t always the answer, and there’s an alternative – modified whole life insurance.

Here we describe the differences between whole life and modified whole life so you can see which one might be right for you.

What Is Whole Life Insurance?

Whole life insurance is the most common permanent life insurance policy. As the name suggests, it’s suitable for your entire life as long as you make the premium payments.

Whole life insurance has two components:

• Death benefit

This is the amount your beneficiaries would receive if you died today. The death benefit is what you pay your premiums for, similar to term life insurance. You can get death benefits from $25,000 – $1,000,000 with most companies.

• Cash value

This is the remaining portion of your life insurance. Any money that exceeds the death benefit premium goes to your cash value. The money is usually invested in a select number of assets, and its value fluctuates.

You can use the cash value while you’re alive by borrowing against it (and repaying it) or withdrawing the funds early. Any money you don’t repay reduces the death benefit dollar for dollar when you die.

Whole life insurance premiums are much higher than term life insurance premiums because you pay for the death benefit and the cash value investment. It’s often an alternative for those who aren’t comfortable investing themselves but know they need to grow their money.

The Pros and Cons

Like any life insurance policy, there are pros and cons of whole life insurance that you should understand.

Pros:

• It lasts for your lifetime. You don’t have to worry about renewing your policy or applying for new life insurance when you’re older and possibly have worse health. Once you apply and are approved, the policy is yours for life if you pay the premiums.
• Your premiums stay the same. You always know the amount of your premiums because they never change from the first payment. This makes it easier to budget.
• Your cash value is tax-deferred. You don’t pay taxes on the earnings in your cash value unless you cash it out.
• You can use the cash value as an emergency fund. If you borrow the funds, you don’t have to worry about qualifying for a loan like you would if you took out a loan at a bank.

Cons:

• You can’t control the investments. The life insurance company offers a select few investment options. You can’t buy and sell assets like you could if you invested them, so you have less control.
• The premiums are high. You pay much higher premiums than term life insurance since you’re paying for the death benefit and the cash value investment. They can be hard to afford.
• If you don’t pay back the cash value you borrow, it decreases your death benefit. Taking as much cash as your death benefit is worth could leave your beneficiaries with nothing.

What is Modified Whole Life Insurance?

Modified whole life insurance is like whole life, but with a different premium structure. It has the same benefits – a death benefit and cash value, but it differs in how you pay for it.

Rather than paying the same premium for your lifetime, you pay an introductory premium for the first two to three years. This is in an attempt to make the policy more affordable for you until you’re more established. After the introductory period, your premium increases to the full amount (higher than the traditional whole life). Your premium changes only once, but that’s often enough.

The Pros and Cons

Since modified whole life insurance operates differently, it’s essential to understand the pros and cons.

Pros:

• Your initial premiums are lower. If traditional whole life insurance seems way too expensive, modified whole life may seem more affordable. You get a reduced premium for the first couple of years, which allows you to save for the higher premiums that occur later.
• You don’t have to limit your death benefit. With the lower premiums, you can still get the high death benefit you want for your loved ones and know that you’ll have permanent life insurance with a cash value.
• The cash value earnings are tax-deferred. When you earn profits on your cash value, you won’t pay taxes on them until (or if) you use the funds.

Cons:

• The premium increase can be too much. The introductory premium may seem enticing, but it could be too much to afford if you ignore how much the premium increase will be.
• The policy doesn’t earn a cash value during the introductory period. When you have reduced premiums, you cover only the death benefit and aren’t investing anything in the cash value.
• The policy is compilated. Whole life insurance policies themselves are complicated, but adding the layer of modified premiums and cash value accounts in there can be too hard to understand.

Who Should Buy Modified Whole Life Insurance?

Modified whole life insurance is an exciting product. It basically encourages you to buy a policy you can’t quite afford yet, by offering lower premiums.

It can work if you have a job you know will have a much higher income in a few years, such as a doctor or lawyer just starting in their career. Beyond that, though, it’s often not worth the risk.

It’s never a good idea to spend money before you have it. What if you can’t afford the higher premiums in a few years? You’re left with no policy, and you’ll have to reapply for new coverage now that you’re older and possibly in worse health.

Give it careful consideration before buying a modified whole life policy. You are usually better off taking the traditional whole life policy you can afford or buying a term life policy and investing your money outside of your life insurance.

Final Thoughts

Whole life and modified whole life insurance sound similar, but they have a significant cost difference. Don’t fall for the advertising of modified whole life insurance. Make sure you understand it, how it works, and what it will cost to assure it’s right for you.