Question: What is whole life insurance

Whole life insurance combines a term policy with an investment component. The investment could be in bonds and money market instruments or stocks. The policy builds cash value that you can borrow against. The three most common types of whole life insurance are: (1) traditional whole life policies, (2) universal and (3) variable. With a whole life insurance policy, you can lock in the same monthly payment over the life of the policy. Beware that whole life insurance is expensive. You're paying not only for insurance but also for the investment portion. Insurance agents like to call these policies retirement plans, emphasizing the "forced savings" inherent in forking over the premiums each month "for retirement." These policies come with high fees and commissions, which sometimes lop off as much as three percentage points from the annual return. However, that's not to say that whole life insurance is always a bad idea. Wealthy people can use whole life in their estate planning by setting up an insurance trust that will pay their estate taxes from the proceeds of the policy. The key to a whole life insurance policy is its internal rate of return, or the yield on the policy after all fees and charges are subtracted. Conducting an analysis can determine, at a minimum, whether the weight of the fees and charges built into one of these policies will ever allow a worthwhile return. This analysis will also pinpoint the minimum amount of cash value that you can derive from a policy at any given time interval.