Whole life insurance is a type of permanent life insurance that covers your entire lifetime. In addition to providing a tax-free death benefit, whole life plans include a savings component where cash value can grow over time. The accumulated interest is tax-deferred. Policyholders benefit from fixed premiums, guaranteed death benefits and the ability to borrow against the policy's cash value. Other forms of permanent life insurance include universal life, indexed universal life and variable universal life. Whole life plans provide financial security and flexibility, making them valuable long-term planning tools.
What Is Whole Life Insurance and How Does It Work?
Updated: October 18, 2024
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Key Takeaways
Whole life insurance offers a level premium and death benefit for the rest of your life with a built-in savings account.
Whole life is an excellent choice for those doing long-term estate planning, supporting a lifelong dependent or owning their own business.
If you decide you no longer need your whole life policy, you can surrender it and keep the cash value amount.
How Does Whole Life Insurance Work?
Whole life insurance is a type of permanent life insurance that combines life coverage with a savings component. This policy offers fixed premiums, a guaranteed death benefit and a cash value component. The cash value, also known as the surrender value, is a distinctive feature that differentiates whole life insurance from term life insurance, as it can be accessed or paid out if the policy is surrendered before death.
A whole life insurance policy is designed to provide lifelong coverage. It remains active for the entirety of the policyholder's life or up to a specified age — usually between 100 and 121 years — provided premiums are consistently paid. Unlike term life insurance, whole life insurance policies continue indefinitely, making them an attractive option for those seeking a lifetime guarantee.
Key Features of Whole Life Insurance
Fixed Premiums: Whole life insurance policies have fixed premiums, which means the amount you pay remains constant throughout the policy's life. These premiums do not increase with age, health changes or inflation. This predictability can be beneficial for long-term financial planning.
Cash Value and Death Benefit: Whole life insurance includes a cash value component that grows over time on a tax-deferred basis. This savings element is unique to whole life insurance policies and is not found in term life insurance. A portion of each premium payment is allocated to this cash value, accumulating interest over time. Policyholders can borrow against or withdraw from this cash value, but it's important to note that any loans or withdrawals reduce the policy's death benefit if not repaid. Additionally, whole life insurance interest is charged on borrowed amounts, impacting the overall cash value growth.
Death Benefit: A life insurance policy's death benefit is the amount paid out to beneficiaries upon the policyholder's death. This payout is typically tax-free and is a primary reason many individuals choose whole life insurance for estate planning purposes. The payout at death ensures that beneficiaries receive a guaranteed sum, provided all premiums are paid up to date and no outstanding policy loans exist.
Tax-Deferred Growth: The cash value component of a whole life insurance policy grows on a tax-deferred basis. This means you only pay taxes on the cash value growth if it is withdrawn. This feature can benefit those looking to build a tax-advantaged savings component for their insurance plan.
How Much Does Whole Life Insurance Cost?
Whole life insurance premiums are generally higher than for term life insurance. Still, whole life coverage offers the advantage of fixed, unchanging payments and a cash value component. Term life only provides coverage for a specified period without these additional features, typically resulting in lower premiums.
The cost of whole life insurance varies widely based on several personal factors:
Age
Generally, the younger you are when purchasing a policy, the lower the premiums may be. Age plays a significant role as insurers assess the risk of insuring an individual over a lifetime.
Health
Your overall health condition can impact whole life insurance premiums. A healthy individual will likely pay less than someone with existing health issues.
Coverage Amount
The death benefit amount you choose directly affects your costs. A higher coverage amount means higher premiums.
Gender
Statistically, women tend to live longer than men, which can result in slightly lower whole life insurance premiums for female policyholders.
Lifestyle Choices
Habits like smoking or engaging in high-risk activities can lead to higher premiums.
Policy Features
Additional features or riders attached to the policy can also influence the cost.
Consider consulting with a financial professional to understand the specific costs based on your needs and preferences, ensuring the policy aligns with your long-term financial goals.
Types of Whole Life Insurance
Whole life insurance is categorized into participating and non-participating policies. Participating policies allow policyholders to receive dividends and share in the insurer's profits, while non-participating policies do not, providing a fixed return without the potential for profit sharing. Below are seven variations you can choose from depending on your unique needs and policy goals.
- 1
Guaranteed Issue Whole Life
Though it’s often the most expensive form of whole life insurance, guaranteed issue is sometimes the only option for people with severe health conditions. There are no health questions or medical exams to complete, and acceptance is guaranteed.
- 2
Simplified Issue Whole Life
This whole life insurance policy requires a few health questions to answer but no medical exam to complete. If you have certain pre-existing conditions, this final expense whole life insurance policy is less expensive than guaranteed issue whole life.
- 3
Non-Participating Whole Life
Non-participating whole life insurance policies don't pay dividends to the policyholder. Dividends are the money the company has left over from collected premiums after overhead expenses and claims are paid. Your whole life insurance company will set the fixed premium, death benefit and cash value when you purchase the policy — these amounts will not change for the policy's duration.
- 4
Participating Whole Life
Simply put, participating whole life insurance is the opposite of a non-participating policy. When the company performs well in terms of investment earnings, mortality and expense costs, you'll be eligible to receive dividends in the form of cash, reduced premium payments, accumulated interest or additional paid-up insurance. Dividends come from a mutual life insurance provider, so seek a mutual insurer if this is important.
- 5
Indeterminate Premium Whole Life
This type of whole life insurance is similar to non-participating whole life, except it offers adjustable premiums. You'll be charged a premium based on the insurance company's investment earnings, mortality and expense costs. If those numbers change, your premium will be adjusted accordingly but will never exceed the maximum premium stated in your policy.
- 6
Limited Payment Whole Life
Under a limited payment policy, you can pay premiums over a shorter period but still get lifetime coverage. However, because you'll be making fewer payments, these amounts will be higher than you typically pay under a continuous premium plan. Cash value will continue to accrue even after life insurance premiums are paid.
- 7
Single Premium Whole Life
As the name suggests, a single premium policy means you'll only pay one large premium at the time of policy inception. After that, the policy is considered fully paid, and no further payments are required. However, many companies will enforce substantial charges if you wish to cash in the policy during the first few years.
Comparing Whole and Term Life Insurance
Term life insurance and whole life insurance are two prominent options for life coverage, each serving different needs and financial goals. Here's a comparison to help you understand the key differences between the two coverage types:
- Duration: Term life provides coverage for a set period (usually 10, 20 or 30 years). It is suited for specific needs like child-rearing or mortgage payments. Whole life offers lifelong protection.
- Cost: Term life is generally more affordable, with potential premium increases at renewal. Whole life costs more due to lifelong coverage and additional features.
- Cash Value: Term life does not include a cash value component. Whole life builds cash value, growing over time.
- Financial Goals: Term life suits short-term needs and immediate coverage. Whole life is ideal for long-term financial security and estate planning.
If you're looking for affordable coverage for a specific time frame, term life may be suitable. If permanent protection, fixed premiums and a savings component align with your long-term planning goals, whole life insurance might be the better option.
Pros and Cons of Whole Life Insurance
Whole life insurance is an excellent option for many people with long-term financial needs. However, while it's the right option for some individuals, it's not for everyone. Learn more about the pros and cons of whole life insurance below.
Pros of Whole Life Insurance
Coverage for Your Entire Life
Whole life insurance covers you for your entire life — or until age 100 or 121 — as long as you pay the premiums on time. Even if you let your policy lapse, you'll still have access to its cash value as long as the policy wasn't drawing from the investment to cover premium payments.
Continuing Death Benefit
With whole life insurance, your heirs will inherit the value of your policy tax-free, no matter how long you live.
Riders Can Make Some Funds Available While You’re Alive
You can include a rider in the policy that will let you start drawing part of the death benefit for long-term care needs. This has an advantage over a long-term care policy, which has a waiting period for receiving benefits.
Ability to Borrow Against Your Policy
You can borrow against your policy tax-free, up to the amount of the cash value.
Straightforward Coverage
You know precisely what you get with whole life insurance: a locked-in premium, fixed interest rate on your cash value and terms that don’t change.
Guaranteed Maximum Expenses and Guaranteed Minimum Interest Rate
There is a guaranteed maximum on the expenses your insurance company can charge you and a guaranteed minimum interest rate on your cash value growth.
Flexibility if Your Financial Situation Changes
If you can’t pay your premiums due to financial hardships, you can use your cash value to cover payments and maintain your policy.
Cons of Whole Life Insurance
Expensive Premiums
Whole life is much more costly than term life and usually more expensive than universal life insurance.
Takes a Significant Time to Accumulate Value
Whole life is a long-term investment; building up your cash value can take years. If you stop making payments due to financial difficulties in the first few years of your policy, its surrender value will be little or nothing. It can take decades of payments before the benefits of whole life significantly outweigh the benefits of term life plus alternative investment options.
Surrender Charges Can Be Expensive
There is a surrender period, usually during the first few years, during which you'll have to pay a surrender charge if you want to withdraw your cash value.
Can Only Borrow Once You Meet Minimum Balance Requirements
To take out a loan against your policy, you typically need a minimum balance (usually around $10,000) and have had your policy for a specified amount of time (usually at least five years).
Difficult to Hold Providers Accountable
Insurance companies do not disclose management fees, rate of return, sales commissions and how much of your premium goes toward your savings component, even though disclosure regulations are in place.
Should You Buy Whole Life Insurance?
If you're looking for a financial tool that offers lifelong coverage and a savings component, whole life insurance might be right for you. For example, if you're interested in estate planning and want to ensure financial security for your family, whole life insurance can provide a stable foundation, fixed premiums and the ability to grow cash value over time.
Below is a closer look at the different types of people and situations that may be suited for whole life coverage.
Those Interested in Estate Planning
Let's say you have a pension plan and have accumulated assets that can generate income after you die. If your estate's net value is more than the set exempt amount at the time of your death, it will be subject to estate tax. A whole life insurance plan can help your beneficiaries pay for these taxes.
Those Supporting a Lifelong Dependent
Dependents may need significant financial support to cover medical bills and everyday expenses after a parent's death. Whole life insurance policies are guaranteed to pay out upon the policyholder's death and grow a cash value account at a guaranteed interest rate, which is available for quick liquidity.
Those Who Anticipate a Need for Long-Term Care
One of the most attractive features of whole life policies is the option to add long-term care. Adding this coverage allows you to access some or all of your policy’s death benefit to pay for long-term care costs not covered by health insurance while you’re still alive. Keep in mind that prices, terms and conditions vary by insurer.
Those Looking for Additional Tax-Free Investment Opportunities
The cash value of whole life insurance grows tax-free. If you've already maxed out on other investment options, such as 401(k)s, and individual retirement arrangements, the cash value benefit plus dividends of a whole life insurance plan are excellent additions to your retirement and investment nest egg. Additionally, you can withdraw or take out a tax-free loan with whole life insurance.
Business Owners
As a business owner, whole life insurance can protect your business's financial stability. It can be used for succession planning, key person insurance or even as collateral for business loans, making it a versatile financial tool for your enterprise.
If deciding to invest in this type of policy, obtaining multiple quotes from reputable whole life insurance companies is a wise first step. Comparing these whole life insurance quotes can help you identify the best whole life insurance policy that combines affordability with the comprehensive coverage you need. Exploring options for affordable whole life insurance can also ensure you find a policy that fits your budget while providing the lifelong protection and financial benefits essential for your peace of mind.
Whole Life Insurance Explained Through an Example
Consider this example to understand whole life insurance better: A policyholder who buys a whole life insurance policy at age 40 with a $500,000 death benefit will pay a fixed $300 monthly premium for the policy's lifetime. The policy remains in force as long as they continue to make these payments. Over time, the policy's cash value grows. By the time the policyholder reaches age 70, the cash value may have accumulated substantially, which they can borrow against or withdraw. However, any outstanding loans or withdrawals reduce the death benefit.
FAQ: Whole Life Insurance
Buying whole insurance is meant to be a lifelong decision. Don’t commit to whole life insurance without finding answers to all your questions. MoneyGeek included some of the most commonly asked whole life insurance questions below to help you decide if this coverage is right for you.
What is whole life insurance?
Whole life insurance is a permanent life insurance policy offering lifelong coverage, fixed premiums and a cash value component, ensuring financial security and support for beneficiaries.
How does whole life insurance work?
Whole life insurance combines insurance coverage with a savings element, where part of the premium contributes to building cash value over time, alongside providing a guaranteed death benefit.
What does whole life insurance cover?
Whole life insurance covers the policyholder for their entire life, providing a death benefit to beneficiaries and potentially covering costs like estate taxes and debts through its cash value.
Should I buy whole life insurance?
Whole life insurance offers coverage for life, so it’s best for people who need to cover permanent financial needs. If you want to pay for your funeral and any debts you have — no matter your age at death — a whole life insurance policy may be the right fit.
Is whole life insurance a good investment?
Considering its cash value component and potential for dividends, whole life insurance can be a good investment for those looking for a conservative financial tool within a broader portfolio.
What are the benefits of whole life insurance?
The benefits of whole life insurance include guaranteed lifetime coverage, fixed premiums, cash value accumulation and the potential for dividends, all of which contribute to financial security and flexibility.
How long do you pay for whole life insurance?
You pay premiums on a whole life insurance policy typically until death or a specified age, usually 100 to 121, with some policies offering options to pay up earlier for lifelong coverage.
What kind of premium does a whole life policy have?
Whole life insurance premiums are fixed. They do not increase with age or health changes, making it easier for policyholders to plan long-term finances.
What types of riders can I add to whole life insurance policies?
Riders are optional add-ons to whole life insurance policies that provide additional coverage or benefits. Common riders include long-term care, disability income, accidental death and waiver of premium. These riders allow you to customize your policy to fit specific needs, enhancing protection and flexibility in various life situations.
Does whole life insurance have a cash value?
Yes, whole life insurance includes a cash value component that grows over time, offering policyholders an accessible financial resource during their lifetime.
When is the face amount of a whole life policy paid?
The face amount of a whole life insurance policy is paid upon the policyholder's death, providing beneficiaries with a tax-free death benefit and ensuring financial support and security.
Is whole life insurance worth it?
For those seeking long-term financial stability and a way to leave a legacy for their beneficiaries, a whole life insurance policy is worth it due to its permanent coverage and cash value benefits.
What is the best whole life insurance?
The best whole life insurance policy is one that fits your financial objectives, offering affordable premiums, reliable coverage and beneficial terms from a reputable insurer.
At what point does a whole life insurance policy endow?
A whole life insurance policy typically endows at the age of 100 or 120, depending on the policy. When a policy endows, the policy's cash value equals the face amount (the death benefit). If the insured is still alive at that age, the insurer may pay out the face amount as a lump sum to the policyholder.
How does whole life insurance work as an investment?
Whole life insurance functions as both life insurance and an investment because it includes a cash value component that grows over time, usually at a guaranteed rate. A portion of each premium payment goes towards this cash value, which can be withdrawn or borrowed against. As the cash value grows, policyholders can use it as a source of funds or allow it to accumulate to supplement retirement income.
What happens to the face amount of a whole life policy if the insured reaches the age of 100?
Suppose the insured reaches the age of 100 (or the age at which the policy endows). The policy typically endows, meaning the cash value equals the face amount. Depending on the terms, the insurer may pay out the face amount to the policyholder, effectively ending the policy, or the policy may continue with the death benefit until the policyholder's death.
When would a 20-pay whole life endow?
A 20-pay whole life policy endows when the insured reaches the age specified in the policy, typically 100 or 120, even though the premiums are only paid for 20 years. After 20 years of payments, no further premiums are required, but the policy remains in force, building cash value and providing a death benefit.
Can you pay off a whole life insurance policy early?
Yes, you can pay off a whole life insurance policy early. This can be done through limited-pay policies like a 10-pay or 20-pay whole life, where you pay all the required premiums within a set number of years. After this period, the policy is fully paid, meaning no more premiums are due, but the policy remains in force for the insured's lifetime.
Do whole life insurance premiums increase?
No, whole life insurance premiums generally do not increase. The premium is fixed when the policy is purchased and remains the same throughout the policy's duration, providing predictability and stability in payments.
About Mandy Sleight
Mandy Sleight is a licensed property, casualty, life and health insurance agent with 20 years of experience in the industry. She has worked for major insurance companies like State Farm and Nationwide, and most recently as the Operations Coordinator for a startup employee benefits company.
Sleight holds a business administration and management degree from the University of Baltimore and a master's in business administration from Southern New Hampshire University. She uses her vast knowledge of insurance and personal finance to create easy-to-understand and engaging content to help readers make smarter choices with their budgets and finances.