What is whole life insurance?

This insurance has higher premiums, but the cash value grows steadily

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Whole life insurance, sometimes called permanent life insurance, is one of two types of life insurance available — the other being term life insurance. Unlike term life policies, which last for a specific duration (e.g., 10 years), whole life insurance will remain in effect until the insured person’s death.

Whole life policies also include a savings component that builds cash value over time at a fixed rate of return. Policyholders may be able to withdraw or borrow against these funds once a certain amount has accrued, but doing so can reduce the death benefit if those funds aren’t repaid.


Key insights

Whole life insurance is a form of permanent life insurance, meaning it lasts for the insured individual’s lifetime.

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Premiums are higher on average for whole life insurance than for term life insurance.

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The cash value grows at a set rate of return, making it easy for budgeting and planning purposes.

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Any loans or withdrawals taken from the policy’s cash value and not repaid will diminish the death benefit.

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What is whole life insurance?

Life insurance is a contract between an insurer and a person, known as the policyholder. The individual agrees to pay a specific sum, called the premium, to the insurance company. In exchange, the insurer agrees to pay a set amount of money, called the death benefit, to the designated beneficiary (or beneficiaries) when the insured person dies.

Whole life insurance is a form of permanent life insurance, intended to last the length of the insured person’s lifetime. Provided it has been kept current, a typical whole life policy will pay a guaranteed, tax-free death benefit to the designated beneficiary (or beneficiaries) upon the insured’s death.

Death benefits can range from as little as $10,000 for a basic guaranteed life insurance policy to as much as $10 million or more for a simplified whole life policy.

This kind of policy also contains a savings component that accumulates cash value at a fixed market rate. Premiums are level, meaning they won’t increase over time. But whole life insurance is much more expensive than comparable term life coverage, in large part because premiums are used in part to fund the savings component.

» MORE: How does life insurance work?

Whole life insurance vs. term life insurance

While whole life insurance is a form of permanent life insurance, term life insurance is temporary life insurance — it only lasts for a designated period of time. Generally speaking, premiums are level and the death benefit is guaranteed in both cases, provided the policies are kept current.

“Young and healthy individuals would benefit most from term life insurance,” said Randy VanderVaate, a licensed insurance agent in Dallas and CEO and founder of Funeral Funds of America. “Younger individuals can lock in coverage at a lower cost compared to whole life insurance, which factors in your entire lifespan for premiums.”

On the other hand, whole life insurance is best for older persons who want to leave a legacy or ensure loved ones are taken care of regardless of how long they live.

“Individuals seeking cash value growth will benefit from whole life insurance because a portion of your premiums goes into a cash value component that grows over time,” said VanderVaate. “This can be a source of supplemental income in retirement or funds for emergencies or future needs.”

How whole life insurance works

Before you buy a whole life insurance policy, you’ll want to consider:

  • How much of a death benefit you want
  • Whether there are any optional riders you want to add to your policy
  • What your budget is

You can find free online life insurance calculators on many insurer websites that can help you determine how much coverage is ideal.

Next, get a quote from at least three or four insurance companies for an idea of what premiums are like. You will likely need to speak with a company representative or agent in order to get a quote, and you also may need to undergo a medical exam before you’re approved to purchase a policy.

In addition, you’ll need to designate a beneficiary (or beneficiaries), who will receive the death benefit upon the insured person’s death. Beneficiaries can include family members, friends or other individuals, as well as institutions such as a church, school or nonprofit.

A typical whole life insurance policy includes the following:

  • A death benefit, which is funded by a portion of your premiums, and grows at a fixed rate of return. It will be distributed to your beneficiaries on a tax-free basis, typically in one lump sum. Generally, death benefits are guaranteed, meaning they cannot decrease unless there are outstanding debts against the policy, such as loan balances or premium payments.
  • A savings component, which accumulates cash value over time at a predetermined money market rate and is also funded by part of your premium payments. Once you’ve accumulated sufficient cash value, it can be withdrawn or borrowed against. Upon death of the insured person, any remaining cash value will revert to the insurance company in most instances.
  • A fixed rate of return on the policy’s cash value until the insured person reaches age 100 or 121, depending on the insurance company and policy.
  • Optional riders that can provide additional coverage in certain instances. For example,  an accidental death rider would pay an extra sum if the insured person dies in a qualified accident.
  • Dividends may be issued if you’ve purchased a whole life insurance policy from a mutual insurance company, which is one that’s owned by the policyholders as opposed to stockholders. These dividends can be applied toward policy premiums or taken as cash.

What is the cash value of whole life insurance?

The cash value of a whole life insurance policy is funded by a portion of your premium payments. That money is invested in a money market account that grows at a fixed rate of return on a tax-deferred basis.

Once the policy’s savings component has accumulated a certain amount of money, you can withdraw it — taxes and fees may apply if you do — or take a loan out against the balance. You can also use the accumulated cash value to fund premium payments in some cases.

However, the death benefit will be diminished as a result of any unpaid loan balances or other outstanding fees. And in most cases, when the insured person does die, any remaining cash value in the policy will not be transferred to the beneficiaries the way a death benefit is; it will revert to the insurer.

Types of whole life insurance

A standard whole life insurance policy provides two things: a fixed-rate investment component for the policyholder and a substantial death benefit for the beneficiaries.

But there are also other types of whole life insurance available as well. Some of the more common options include:

  • Final expense insurance, sometimes called funeral or burial insurance, is designed for older adults. Premiums are significantly lower than other forms of whole life insurance, as is the death benefit. Despite the name, beneficiaries can spend the death benefit any way they see fit; it does not have to be used for final expenses.
  • Guaranteed-issue whole life insurance is coverage that you cannot be turned down for. Like final expense insurance, a guaranteed-issue policy has low premiums and a low death benefit.
  • Indexed whole life insurance pegs the savings component to a market index fund, such as the Nasdaq composite, rather than a lower-interest money market.
  • Joint life insurance is designed for couples. Depending on the policy, the death benefit may be paid either when the first of the two insured persons dies or not until after both partners have passed (this is sometimes called survivorship life insurance).
  • Single-premium whole life insurance requires policyholders to make one lump-sum premium payment upfront, rather than in regular installments, making it prohibitively expensive for many people.
  • Variable whole life insurance lets the policyholder have a say in how to invest the cash value, but this comes with greater risk due to market volatility.
  • Whole life insurance for children covers kids in much the same way as a whole life policy would cover a parent, with a guaranteed death benefit and a savings component.

» MORE: Types of life insurance

Pros and cons of whole life insurance

Unlike term life insurance, which is temporary, a whole life policy will remain valid for as long as the insured person is alive and premiums are paid. In most cases, premiums will not increase and the death benefit is guaranteed.

Whole life insurance policies accumulate cash value over time, which can be borrowed against or withdrawn. Most companies also offer a range of optional riders or add-ons to customize your policy.

Pros

  • Premiums are level in most cases
  • Accumulates cash value
  • Lasts for insured person’s lifetime

Cons

  • More expensive than term life insurance
  • Other forms of investment offer higher rate of return
  • Costs more to buy coverage the older you are
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FAQ

How much is whole life insurance?

The cost of whole life insurance depends on several factors, including your age, gender and general health (including whether or not you smoke). Your premium will also vary based on how much coverage you want and whether you opt for policy riders or add-ons, such as an accidental death benefit or disability waiver of premium.

What's the difference between universal and whole life insurance?

With whole life insurance, premiums are fixed, the savings component grows at a steady rate of return, and the death benefit is guaranteed. With universal life insurance, both the premium and death benefit can be increased or decreased once sufficient cash value has been accumulated.

Can you cash out whole life insurance?

Yes, you can cash out (aka surrender) your whole life insurance policy provided that it has accumulated sufficient cash value. However, you will face significant financial penalties for doing so — as much as 40% of the cash value. In addition, your payout will be further diminished if you have an unpaid loan balance from borrowing against the policy or are delinquent on your premium payments. Surrendering the policy renders it null and void.

Bottom line

Whole life insurance is ideal for someone who wants to provide a financial legacy for their beneficiaries, along with an investment component to provide potential income later in life. In most cases, premiums are fixed, and the cash value grows at a set rate, which can provide some peace of mind when it comes to financial planning.

Premiums for whole life insurance are significantly higher than for term life insurance, but that’s because a portion of your payments goes toward the savings component. Once sufficient cash value has accumulated, you may be able to tap into it by making a withdrawal or taking out a loan. But if you don’t repay these funds, the death benefit will be diminished.


Article sources
ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
  1. Insurance Information Institute, “Life Insurance Basics.” Accessed Mar. 8, 2024.
  2. Progressive Insurance, “Types of life insurance explained.” Accessed Mar. 8, 2024.
  3. Fidelity Life, “Whole Life Insurance.” Accessed Mar. 8, 2024.
  4. New York Life, “Whole Life Insurance.” Accessed Mar. 11, 2024.
  5. Progressive Insurance, “What is the difference between whole life vs. universal life insurance?” Accessed Mar. 11, 2024.
  6. Farmers Insurance, “Universal Life Insurance.” Accessed Mar. 11, 2024.
  7. Fidelity Life, “Can You Cash Out a Whole Life Insurance Policy?” Accessed Mar. 11, 2024.
  8. Fidelity Life, “RAPIDecision Whole Life Insurance for Seniors.” Accessed Mar. 11, 2024.
  9. USAA, “Permanent Life Insurance.” Accessed Mar. 11, 2024.
  10.  Guardian Life, “The pros and cons of whole life insurance.” Accessed Mar. 11, 2024.
  11. Allstate, “What is cash value life insurance?” Accessed Mar. 11, 2024.
  12. Guardian Life, “How does whole life insurance work – and what can it do for you?” Accessed Mar. 11, 2024.
  13. Northwestern Mutual, “How Whole Life Insurance Works.” Accessed Mar. 11, 2024.
  14. Allstate, “What is whole life insurance?” Accessed Mar. 12, 2024.
  15. Mutual of Omaha, “Children’s Whole Life Insurance.” Accessed Mar. 12, 2024.
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