Whole life insurance is the most common type of permanent insurance policy. As with all permanent policies, it offers lifelong coverage and a cash value component. A unique benefit of whole life insurance is its guarantees, specifically its guaranteed premiums and death benefit. However, whole life insurance isn't the right policy for everyone. It's important to weigh this insurance's costs and benefits before buying.
What is whole life insurance?
Whole life insurance coverage is a permanent life insurance policy, so coverage lasts your entire life. It also offers a cash value component, which grows your policy's value. You can use the accumulated cash value for various financial goals or needs.
How whole life insurance works
To obtain and maintain whole life insurance coverage, you must pay an annual or monthly premium (the cost of insurance). A portion of your premiums earns interest, growing your policy's cash value. When you pass away, your beneficiaries receive the proceeds of your policy, which can include the cash value you've built.
You can find our guide on the best whole life insurance here.
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Benefits of whole life insurance
Lifetime coverage
Like all permanent policies, whole life insurance offers coverage your entire life. So you don't have to worry about retaking the medical exam and proving insurability as you age or develop health issues.
Fixed premiums
Whole life insurance stands out from other types of permanent life insurance because your premiums stay the same throughout your life, making it easier to budget for this cost.
Cash value accumulation
Cash value growth in life insurance is a benefit specific to permanent policies. Your insurance company funnels a portion of premium payments towards a tax-deferred investment portfolio. Different insurance plans have different methods of earning interest. Cash value from whole life insurance plans accrues value based on a fixed rate set by the insurer.
Policyholders can use the cash value to fund various financial goals, such as paying their children's college tuition, funding a business, or purchasing a second home. Most people use the cash value to fund their retirement.
You can even use your cash value to pay off premiums in the future. "The cash value put inside the policy earns interest, and you use that bucket of money to offset the cost of insurance when you're older," says Mark Williams, chief executive officer of Brokers International.
Potential dividends
Your insurer may pay dividends if you have a participating whole life insurance policy. You can reinvest those dividends, use them as income, apply them toward future policies, or use them to purchase additional insurance coverage.
Comparing whole life to other policies
Whole life insurance vs. term life insurance
While whole life insurance provides coverage for your entire life, term life provides temporary coverage. With a term policy, you pay fixed premiums for a designated term—usually between ten and 30 years—for a fixed death benefit.
If you die during your term, your beneficiaries receive a death benefit. If you outlive your policy and pass away without renewing your coverage, your beneficiaries won't receive a death benefit.
Whole life insurance vs. universal life insurance
Universal life insurance allows more flexibility than a whole life policy. You can raise or lower your death benefit, which increases or decreases your premiums based on your financial situation and needs. For example, you can lower your death benefit if you need less coverage because your mortgage is almost paid off. As a result, your premiums decrease.
How much does whole life insurance cost?
The benefits of permanent life insurance (lifelong coverage and cash value growth) spell higher premiums than term life insurance. Your individual premiums vary based on age, health, lifestyle, and more.
According to Policygenius, the average monthly cost of whole life insurance for females is $408 per month, and for males is $472 per month. Take a look at the average monthly cost of a $500,000 whole life insurance policy for males and females of different ages. These costs are for non-smokers in good health.
| Age | Male | Female |
| 20 | $334 | $287 |
| 30 | $472 | $408 |
| 40 | $706 | $588 |
| 50 | $1,091 | $920 |
Source: Policygenius
Who should consider whole life insurance?
If you're looking for lifelong protection with cash value that grows at a predictable and steady rate, whole life insurance is worth considering. It's worth noting that cash value in a whole life policy is low risk and low-return, which means you won't be making as much money as a long-term investment in the stock market.
Permanent life insurance is also typically cost-prohibitive. The average person may be unable to afford a $1 million universal life insurance policy. If you can't afford a permanent life insurance policy right now, you can get a term life policy that can be converted to a permanent policy.
Williams suggests a combination of permanent and term life insurance. For example, if you have $200,000 in permanent life insurance and $300,000 in term for 20 years, at the end of 20 years, the term life insurance policy will expire, but you will still have your $200,000 permanent policy, which would have increased in cash value.
However, you should only purchase what you can afford. It's important to talk to a financial advisor about your situation and goals to determine the best life insurance policy for you.
How to choose a whole life insurance policy
Once you sign off on your whole life insurance policy, it can be difficult to cancel. When it comes to finding a policy that checks your boxes, take your time. Here are some components to look out for:
- Coverage needs: Different insurance companies offer different policy features. Look at the rate of return on the cash value, flexibility in premium payments, options for dividends (if the policy is participating), and rider (optional add-ons) availability.
- Eligibility: Traditional whole life policies require a medical exam, which includes a blood test and urine sample, as part of the underwriting process. You may not qualify for a traditional policy if you have pre-existing health conditions. In that case, consider no medical exam life insurance.
- Company reputation: Read through online reviews and check the insurer's customer and claims satisfaction ratings to ensure you're selecting a reputable insurance provider.
- Financial stability: Financial stability in life insurance indicates a company's ability to meet long-term financial obligations. Look at credit rating agencies such as AM Best, Moody's, Standard & Poors, and Fitch to determine where the company stands in terms of financial performance.
Consider working with a financial advisor or an insurance broker to help you determine your coverage needs and find a policy that matches those needs at the best price.
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$19 for males and $16 for females per month
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- Term life and whole life
FAQs
Is whole life insurance worth the cost?
Whole life insurance may be worth the cost for those seeking lifelong coverage, fixed premiums, and fixed cash value growth.
Can I withdraw cash from my whole life insurance policy?
Yes, whole life insurance policyholders borrow or withdraw from their cash value. However, accessing cash value in life insurance policies reduces your death benefit, leaving less for your beneficiaries.
How are dividends from a whole life insurance policy taxed?
Dividends from whole life insurance policies are generally not taxed as income as long as they don't exceed the premiums paid into the policy.
What happens if I stop paying premiums on my whole life insurance?
If you fail to make a payment on your whole life insurance policy's due date, your insurance company will give you a grace period or extra time to make up a payment. During this time, your policy remains active. However, if you fail to make the payment past the grace period, your coverage will end. You can use the cash value you've built to pay your premiums if you can't afford it.
How do I choose the right whole life insurance policy?
When picking a whole life insurance policy, consider your coverage needs, the insurer's reputation and financial stability, and the policy's features and benefits. Consult a financial advisor or an insurance broker to help you find a policy that best fits your needs and budget.
