What is Whole Life Insurance?

A whole life insurance policy can help your spouse, children, or other beneficiaries remain financially secure after your death or provide them with money to take care of your end-of-life expenses. As a type of permanent insurance, a whole life policy is intended to stay in force from the day it goes into effect until the end of your life.

Whole life also has a feature called cash value. This is a type of savings account that earns interest while the policy is in force. You can access this money through a withdrawal or loan, making it an additional tool in your financial planning portfolio.

How does a whole life insurance policy work?

When you purchase a whole life insurance policy, you choose an amount of coverage called a “death benefit” and choose beneficiaries—usually your family, but possibly business partners or others who might be financially dependent on you. Upon your death, the insurance company pays the death benefit to these beneficiaries.

To keep the policy in force, you pay an annual premium to the insurance company. The premium varies by policy. It’s based on the amount of death benefit you choose and other factors such as your age and health.

Unlike a term life insurance policy, which expires after a set number of years, a whole life policy stays in effect until your death—this is why it’s considered a type of “permanent” life insurance. The insurance company will not revise your premium or cancel the policy if your health takes a bad turn.

Understanding cash value

Besides being a type of permanent insurance, a whole life policy is also a form of cash value insurance. Cash value is a savings component that can provide financial benefits while you’re still living.

Think of cash value as a savings account. When you pay your annual premium, the insurance company uses part of your payment to provide your insurance, part for administrative fees, and part to fund the cash value. The insurance company will then use the cash value to fund its investment portfolio, rewarding you with interest and, sometimes, a dividend. Whole life policies guarantee a return, while other cash value policies (such as universal life) offer varying degrees of financial risk and reward.

As your cash value grows over the years, you can access this money in multiple ways.

Make a withdrawal

You can withdraw funds from your cash value as you would from a savings account. However, the amount withdrawn is typically deducted from your death benefit amount. And if your withdrawal amount exceeds the amount of money you’ve invested into the cash value, the excess may be taxable. You should discuss this with a certified tax preparer.

Take out a loan

Your insurer may offer the option to take out a low-interest loan against the cash value. As with any other loan, the balance will accrue interest until it's paid back in full. If you die with an outstanding balance, that balance will be deducted from the death benefit.

Surrender the policy

You can surrender (cancel) the policy if you no longer need it. You’ll receive the accumulated cash value with any outstanding loan balances and fees deducted. As with a withdrawal, any money you receive in excess of what you put into the cash value may be considered taxable.

You might choose to surrender a policy if your financial needs change—perhaps you pay off your mortgage, or your children grow into adults and no longer rely on you for financial support.

You can use your cash value any way you see fit—for emergency expenses, to help pay for college, to take a vacation—there are no restrictions. You can even use it to pay the policy’s premium. You can, of course, choose to let the cash value continue to grow as a supplement to your retirement savings.

Be aware, however, that if you die, the insurance company keeps your cash value—it’s not included in the payout to your beneficiaries. This is a caveat of cash value policies and why many financial pundits recommend against life insurance as an investment tool.

A whole life insurance example

Let’s look at an example of how whole life can be used.

Mary, a 68-year-old widow, is in good health and has grown children. But she doesn’t want to burden those children with any expenses upon her death. She contacts Ethos Life to purchase a whole life insurance policy with a $15,000 death benefit. She names her children as the policy beneficiaries.

As the years go by, Mary pays her annual policy premium and otherwise leads an active life. At one point, she takes out a small loan against her Ethos Life policy to help pay for a vacation with her grandson.

A few weeks after turning 83, Mary has a bad fall and has to spend time in the hospital. The lengthy recovery, combined with her lack of mobility, contribute to the deterioration of her health. She passes away at age 85.

Her children gather to give Mary the kind of memorial she would have wanted and to pay some of her outstanding medical bills. They file a claim with Ethos Life and soon receive the $15,000 death benefit. It's money that will go a long way toward those expenses.

Types of whole life

If you're shopping for whole life insurance, you might face numerous variations on the standard type of policy described above. A few of these include:

Indexed whole life insurance

With an indexed whole life insurance policy, the cash value grows at a rate tied to the performance of a stock index, such as the S&P 500 (the insurer chooses the index). This may help increase your cash value growth, though some insurers put limits on maximum returns.

Variable whole life insurance

If you want more say in how your cash value is invested, you might consider variable whole life. With these policies, you select from among a portfolio of funds provided by your insurance company. Your cash value then grows based on the performance of those selections.

Guaranteed issue whole life insurance

Guaranteed issue is intended for people over 50 who need smaller death benefits, usually just enough to cover end-of-life expenses. These policies typically skip the traditional underwriting process, which simplifies the purchase. These policies may lack a cash value feature.

Single-premium whole life insurance

Single-premium whole life allows you to skip the annual premium payments. Instead, you pay the entire premium up front when you purchase the policy.

How much whole life insurance costs

Whole life insurance is expensive, even relative to other types of permanent insurance.

According to a recent study by USNews.com, the average monthly cost of a whole life insurance policy with a $1 million death benefit for a non-smoking policyholder with average health is as follows:

Pros and cons of whole life insurance

There is no “one-size-fits-all” life insurance policy. Everybody has different needs, and there are multiple types of life insurance to suit those needs. If you’re considering whole life insurance, you’ll want to consider these advantages and disadvantages.

Whole life vs. term life insurance

Whole life is different from another common insurance type, term life. While both types of policy provide a death benefit to your beneficiaries in return for your paying a premium, some differences lie in how the policies are structured.

A term life policy is not permanent. Instead, it stays in force for a set number of years before expiring. So when you buy a term life policy, you not only choose a death benefit amount and designate your beneficiaries but also a term length. Term life also lacks the cash value component. It's insurance, pure and simple.

So you might purchase a term life policy with a 30-year term shortly after you get married and buy a home. This ensures coverage throughout the mortgage, protecting your spouse from defaulting on the loan should you die and the family no longer have your earnings.

Because of its simplicity compared to whole life, a term life policy usually costs much less.

Best whole life insurance companies

You have many options for whole life insurance. Leading insurance brands such as State Farm and Northwestern Mutual offer multiple policy options and the benefit of working one-on-one with an agent or advisor who can guide you through the insurance-buying process.

If you prefer to do things by yourself, check with Everyday Life. As an online broker, it offers whole life policies from multiple companies. Everyday Life also provides an easy-to-use tool to help you get coverage that works for your budget, all in minutes.

Should you get whole life insurance?

Whole life insurance is best for a certain kind of person, including the following:

• You need insurance that lasts longer than the standard 30-year maximum of a term life insurance policy, or you want coverage until your death to help pay for end-of-life expenses.
• You intend to use the death benefit to fund a trust that'll support your children upon your death.
• The value of your estate exceeds the current estate tax exemption, and you intend the death benefit to help your beneficiaries pay those taxes.
• You've maxed out your 401(k) and other investment options and are looking for additional ways to diversify your investment portfolio.
• You own a business and want a partner to be able to purchase your shares after your death.

Many people who just need insurance to help their family remain financially secure after their death would be best served with a term life policy. But a whole life policy might be right for you if you have more sophisticated needs. Consider discussing your circumstances with a licensed insurance agent or financial advisor who can help you get the best policy for your situation.

TIME Stamp: Whole life insurance provides financial security and a savings component at a cost

A whole life insurance policy can help you ensure your family's financial security after death. As permanent insurance, a policy stays in effect until your death, provided you pay your premiums. Whole life also offers a cash value feature that can provide added flexibility to your financial planning. Whole life isn't the right choice for everyone. An insurance agent or financial advisor can help you understand if it's right for you.

Frequently asked questions (FAQs)

Is a whole life insurance policy a good investment?

Deciding whether whole life insurance is a good investment depends on your personal goals. Whole life policies tend to provide modest returns compared to other investments. But whole life could make sense if you need a way to diversify your overall portfolio. A financial advisor can help you understand whether whole life insurance is a good investment.

Can a whole life insurance policy mature?

Whole life insurance policies typically mature when the policyholder's age is between 100 and 120. At this point, the insurance company may close the policy and pay the total cash value to the policyholder, or extend the policy until the policyholder's death.

Which is better, term or whole life insurance?

Term and whole life insurance each serve people with different needs. Those simply needing life insurance for a set period of time may be best served by a term policy. Those who want life insurance to last until their death or believe they could benefit from a policy's cash value might consider whole life.