What Is Whole Life Insurance? A Complete Guide

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Nobody likes to think about their death, but for those with dependents, creating a financial safety net for their loved ones is a necessary consideration. While term life insurance can provide affordable coverage for only the period of time when you need it the most — such as when you have young children — some people want a lifelong option. That’s where whole life insurance comes in. 

Whole life insurance provides a lifelong insurance policy with a set death benefit. However, it’s also much more expensive than alternatives like term life insurance. According to the financial experts we talked to, whole life insurance can be the right policy in specific situations, but most people should look at other options like term life insurance instead. Here’s why. 

What Is Whole Life Insurance?

Whole life insurance pays out a sum of money (often called the death benefit) to the people, businesses, trusts, or charities designated as your beneficiaries when you die. Whole life policies are permanent, which means your beneficiaries will get your death benefit no matter when you die. In contrast, a term policy only covers you for a period, such as 10 or 20 years.

Whole life insurance also comes with a cash value component. As you pay your premiums, your life insurance provider sets a portion of that money aside into an account where it can grow at a steady (albeit usually very slow) rate. 

How Does Whole Life Insurance Work?

Beyond the fact that whole life insurance is a permanent policy that will last your lifetime, the policy’s cash value and fixed premiums are important to understand.

Fixed premiums are the amount you pay for your policy. With whole life insurance, you can usually decide how long you want to pay your premiums. You could choose to pay higher premiums for 20 years so that they’re finished by the time you’re retired, or opt to pay lower premiums until you’re 100, for example. Either way, your premiums won’t change over the years. 

Then there’s the cash value component. With a whole life policy, the cash value of your account grows at a rate set by your insurance provider, although you may have the option to add any dividends to your cash value, growing it further. 

Other permanent life insurance policies come with a cash value component, but that cash value grows differently. Universal life policies grow their cash value at a rate tied to a specific interest rate, like the rate of a money market account. Variable life policies invest the cash value, and the rate of growth depends on the performance of the investment. 

For people looking for permanent life insurance with level premiums and a fairly predictable cash value growth, whole life insurance delivers. The Insurance Information Institute (III) reports that whole life is the most popular type of permanent life insurance policy. 

The biggest draw of having a cash value on your life insurance is that it gives you a way to use your life insurance while you’re alive. In many cases, once it reaches a certain amount, you can use the cash value to pay your premiums. 

You can also withdraw the savings or borrow against it during your lifetime for any reason, such as paying for a child’s or grandchild’s college tuition, says Laura Adams, author and host of the Money Girl podcast.

Just be advised that any withdrawals or outstanding loan balances will reduce your death benefit by the amount you’ve taken out. Still, it may be worth it to use your cash value when you need to. If it’s still sitting in your account when you die, it reverts back to the insurance company. Unless your insurance policy specifies otherwise, beneficiaries are only paid the death benefit of a whole life insurance policy, not the cash value.

Jeremy Schneider, the founder of Personal Finance Club, cautions anyone from considering life insurance policies as an investment. “It’s an insurance product,” he says. “If your financial advisor is recommending you buy whole life insurance, you don’t have a financial advisor, you have an insurance salesman.”

Who Qualifies for Whole Life Insurance

Since life insurance companies make money by carefully calculating your risk of death, it’s no surprise that healthier and younger people tend to have an easier time qualifying for life insurance and pay less for their policies. Those with chronic or serious health conditions, or who frequently engage in hazardous activities — whether as a hobby like skydiving, or as an occupation like a construction worker — may find it harder to qualify for life insurance. However, some companies offer life insurance tailored to those groups, including options like a no medical exam policy. In these cases, though, be prepared for higher whole life insurance rates.

How Much Does Whole Life Insurance Cost? 

Whole life insurance costs significantly more than term life insurance, so much so that Adams says it may not be affordable for many individuals and families. She says a whole life policy could cost as much as 15 times more than a term policy. 

Keep in mind that the amount you pay for whole life insurance depends on quite a few factors that are specific to you, like your:

  • Age
  • Gender (women generally pay less because of their longer life expectancy)
  • Personal health history
  • Family health history
  • Smoker status
  • Engagement in risky occupations (like roofing) or hobbies (like skydiving)

To summarize, anything that increases your risk of premature death can lead to higher whole life insurance rates. 

Schneider was able to give us a ballpark range to consider. “Many whole life policies I’ve seen sold to unsuspecting young investors are in the $200-$500/month range. By contrast, an online quote I just ran for a 20-year term life insurance policy with a $1,000,000 death benefit for a healthy 30-year-old man was $42,” he explains. 

Like all insurance products, it pays to shop around to find the best possible rate for your whole life insurance policy. Also, remember some financial planners receive commissions from insurance companies, which may skew their advice.

How Does Your Beneficiary Receive the Value of Your Policy?

As with any insurance product, beneficiaries need to file a claim to get the policy benefit. Usually, they’ll need your death certificate and the policy to collect that money. Most death benefits get paid out as a lump sum, but if you choose a policy with a structured payment plan, your beneficiaries might get the death benefit in installments. The death benefit is not subject to taxation, according to the IRS.

This all assumes that you leave your death benefit untouched through the life of your policy. As we mentioned, you can withdraw or take a loan against your cash value. Any withdrawals or unpaid loans will reduce the death benefit your beneficiaries receive by that amount.

Whole Life Insurance vs Term Life Insurance 

Unlike term life insurance, whole life insurance never expires and also includes a cash value component. It’s also significantly more expensive, costing as much as 15 times more than a similar term life insurance policy. In many cases, it’s not the best option.

“For those who need life insurance because someone depends on their income to live, term life insurance is a dramatically less expensive option for the same level of death benefit,” says Schneider. For those who are drawn to the cash value component of whole life insurance, “you can invest the remainder of what you would have paid for a whole life insurance premium and come out way ahead — whether or not you meet your untimely demise.”

Pro Tip

If you want a permanent life insurance policy with reliable benefits while you’re alive, whole life insurance delivers. But it also costs significantly more than term life insurance, which can give your loved ones the same death benefit.

Still, there are some scenarios where a whole life insurance policy might make sense. “If you’re certain that you want one or more beneficiaries to receive a payout no matter when you die, then whole life may be a good choice,” says Adams. “For example, if you have a disabled family member who earns no or little income or an aging parent who requires expensive, ongoing care, a whole life policy can be part of your estate planning.”

But speaking of estate planning, Schneider offers this caveat: “[Whole life insurance is] often sold as a way to pass wealth tax-free to your children. The insurance salesmen almost always forget to mention that there is no estate tax on the first $11.7 million you pass on to your children if you’re single ($23.4 million for married couples), rendering that benefit moot to all but the extremely wealthy.”

Whole Life Insurance Companies 

Looking for a whole life policy? “If you have an existing relationship with a financial institution that offers whole life insurance, that may be an excellent place to start,” Adams says. “In some cases, bundling life with other coverages, such as home, renters, or auto, can save money.” 

Beyond shopping with your existing insurance provider, we have a few recommendations:

State Farm 

State Farm offers whole life policies, along with term and universal life insurance. The company scores well in terms of customer satisfaction, but it doesn’t offer any life insurance discounts. With State Farm, you have the option to pay for your entire policy in one lump sum (called single premium life insurance), to pay regular premiums up to age 100, or to pay premiums for a set number of years that you and the company agree upon. 

Progressive

Progressive can give you a quote for whole life insurance online. But be advised that the company’s customer satisfaction is something of a mixed bag and it doesn’t offer any life insurance discounts. 

Nationwide

Nationwide does offer a bundling discount if you pair your life insurance policy with a home and/or auto policy from the company. It also offers a number of different riders, which allow you to add features to your life insurance policy (like coverage for long-term care) in exchange for a higher premium. Nationwide has two premium options: pay until you’re 100 or pay for 20 years. Their customer service reviews are fairly average.