Two of the most common types of life insurance are term and whole. Term life insurance, while typically more affordable, only lasts for a set period of time, while whole life insurance offers a permanent form of protection for the rest of your life.
However, under the umbrella of whole life insurance, there are several types, each offering various benefits and disadvantages for owners. One kind of whole insurance is called modified whole life insurance. For some, it may be an option to explore. Here's what you need to know about it.
What Is Whole Life Insurance?
While term life insurance is a popular option because of its affordability, whole life insurance is something to consider if you have more complex financial needs.
Whole life insurance, also called permanent life insurance, lasts your entire life as long as you pay your premiums. Unlike term coverage, it won't end after 10 or 20 years. However, because whole life insurance expands coverage and usually has a cash value investment-style savings component, it tends to be more expensive.
Modified whole life insurance is coverage that offers some of the potential advantages of more affordable rates for a set time with the permanence of whole life insurance policies.
The Basics of Modified Whole Life Insurance
Modified whole life insurance provides full life coverage but has an alternative premium structure. The policy allows for lower premiums for the first few years of coverage, and then the premiums rise for the remainder of your life.
The time frame for lower premiums is called an introductory period. Usually, it lasts anywhere from three to five years, depending on the policy. After the initial period ends, your premiums will rise, sometimes significantly. In general, the longer you pay lower premiums on the front end, the higher the rates will become once the introductory period is over.
As with a standard whole life insurance policy, your death benefit will not change during your introductory period. It is locked in when you purchase your policy and remains the same throughout the life of your coverage.
What's the Difference Between Whole and Modified Life Insurance?
There are two primary differences between a standard whole life insurance policy and a modified life policy.
Your premiums are locked in when you purchase coverage with a whole life insurance policy. As a result, what you pay stays the same throughout your coverage.
A modified life policy allows for an introductory period where you'll have lower premiums, and then your premiums will go up. However, once you're out of the introductory period, your premium will not change.
For example, if you're a 40-year-old man in good health, your average whole life insurance premium may be approximately $530 per month for $500,000 in coverage. However, for a modified whole life policy, that same policy may cost $150 a month (or less) for the first three years and then go up to $800 a month (or more) for the rest of your life.
The higher rates are set to essentially compensate for the low premium costs during the introductory period.
For many, an advantage for a whole life insurance policy is the cash value benefit. Typically, policies that offer cash value have a savings component. A percentage of the premium is added to the savings portion of your policy and grows tax-deferred — you don't pay taxes on the contributions.
The cash value of your policy must be used during your lifetime. For example, you may eventually use it to pay your premiums, or you could completely buy out your policy and keep the cash component.
Typically, with whole life insurance policies, the premiums start funding the savings portion right away. However, with a modified life policy, you may have to wait until the end of the introductory period.
What's the Payout During the Introductory Period?
With life insurance, another consideration is what happens after your death. In general, your beneficiary receives death benefits as a cash payout, assuming coverage is up to date at the time of your death.
The same is true with a modified whole life policy. As long as you are paying the premiums, the policy will cover you. So, even though you may be paying less during the introductory period, your beneficiaries would still get the full death benefit if you were to die during that time.
Pros and Cons With Modified Whole Life Insurance
Just as with any life insurance policy, there is no one-size-fits-all coverage. As such, it's important to understand the pros and cons of every type of coverage you're considering.
Here are a few considerations for this type of policy:
- It provides whole life coverage that will last for the remainder of your life.
- Your death benefit will never change, even when the premium rates do.
- The lower rates could be more attractive initially, especially if you expect to be able to afford the higher premiums.
- Some carriers use minimal underwriting for modified whole life coverage, which may allow you to get the coverage you wouldn't typically qualify for due to illness.
- If you add all the costs, you may end up paying more throughout your coverage than if you had purchased a standard whole life policy.
- You may not be able to afford the premium after the introductory period, potentially jeopardizing your policy.
- If you're unable to build the cash value portion of the policy from the start, the value could be impacted over time.
- These policies tend to be more complicated compared to traditional whole life policies.
Other Factors to Consider
Modified whole life insurance may not be the best fit for everyone. However, there are some situations where it could make sense to consider.
For example, if you're someone with health-related issues and don't qualify for traditional, permanent coverage, you may be able to secure a policy that will lock in a death benefit and last the rest of your life. Or, if you are younger and healthier, want the benefits of permanent coverage and are confident you can afford the higher premiums later on, you may secure it now and pay the lower rate.
As you review the pros and cons, applying them to your situation is important. First, look at your budget, including the overall long-term costs of coverage, to help you decide. Another resource to help can be a financial professional. Speaking with them about your concerns and financial picture can help you develop a plan.
The Bottom Line
Trying to find a life insurance policy can often feel complex. With so many types and terms to know, it's easy to feel overwhelmed and push it to the back burner.
The reality is that life insurance is important. It's a way to financially protect your family if you pass away unexpectedly. Learning about different types of life insurance can help you make the best choice for your needs.