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By Gabriella Cruz-Martínez
October 19, 2020
Money; Getty Images

Whole life insurance is a type of permanent life insurance designed to financially safeguard your beneficiaries in the event of your death through a guaranteed death benefit. It also provides a “cash value” component from which you can withdraw funds or even cover your insurance premiums.

“The advantage of whole life insurance is that it offers three kinds of beneficial guarantees: a guaranteed rate of return on the cash value, the promise that your premium payments won’t go up, and a guaranteed death benefit that won’t go down,” says Faisa Stafford, president and CEO of nonprofit Life Happens.

However, whole-life insurance is also expensive and its cash value accumulation depends on the amount the insurer is making on investing your premiums, and those earnings are modest in times of low interest rates, such as now.

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Whole Life vs. Term Life Insurance

Whole life insurance is often considered in tandem with term life insurance, which provides coverage for a certain period of time. Here’s how the two types of life insurance policies compare on some key attributes.

Duration of coverage

Whole life insurance policies remain active for your entire life, as long as you keep paying your premiums. By contrast, most term life insurance lasts for a specified period, its term — although some companies offer term policies that you can renew annually, which essentially have a one-year term.

Cost

Where premiums for whole life policies never vary, so long as you continue paying them, those for term life may vary if you choose to renew the policy after the term expires. But the premiums for a whole life policy will likely be higher, regardless. According to Chris Huntley, life insurance consultant and founder of If You Build It, whole life can cost up to 10 times more than term life insurance, in large part because you are buying both a death benefit and an investment.

However, the relative cost of either a term or whole life insurance policy is determined by many of the same factors:

  • Age – The younger you are, the cheaper your premiums, as a rule
  • Medical history – And not just your own medical history, but your parents’ as well. If you or one of your parents suffers from a chronic illness like diabetes or hypertension, you’ll end up paying more for your policy
  • Habits – if you’re a smoker — or even a former smoker — your premiums will be higher than those of non-smokers

Eligibility

Life insurance companies determine your eligibility for coverage based on details such as your age, gender, employment information, medical history, and lifestyle (whether you smoke, drink, have a high-risk job, or practice any extreme sports).

However, there are differences between term and whole life when it comes to re-insurability. With term life, if you develop a terminal illness or serious chronic condition you may not be able to renew the policy unless you have purchased a “guaranteed insurability” rider. With a whole life policy, on the other hand, you’re covered for life as long as you don’t default on your payments, regardless of your age or health status.

Cash Value

Term life policies provide a death benefit if you die within the policy’s term. If you outlive that term, the policy will not provide a death benefit. Some insurers offer a “return of premium” rider, which allows you to recoup the amount you paid throughout the years if you survive your policy, but that feature doesn’t come cheap. According to David Gastwirth, insurance strategist at American Business, adding this kind of rider could increase your premiums by 10% or more.

Whole life policies also provide a death benefit. But they also have what’s called a “cash value,” which is one of the main reasons they’re more expensive than term life policies.

The cash value of a policy is basically a savings component in which a portion of your premiums is invested to accumulate wealth. These earnings usually grow on a tax-deferred or tax-free basis and, depending on your policy, you may withdraw or borrow part of that cash value or use it to pay your monthly premiums.

If you pass away and there is an outstanding balance in your cash-value account, that money will be deducted from the death benefit. If there is no outstanding balance, your beneficiaries will receive the full death benefit amount, but the cash value will go back to the insurance company. That is unless you’ve purchased a rider that entitles your beneficiaries to receive the policy’s face value (the death benefit) as well as the cash value.

Whole vs. Term Life Insurance
Whole Life Insurance Term Life Insurance
The guaranteed death benefit doesn’t expire as long as premiums are paid. The death benefit is lost if the policyholder outlives the term (10-30 years).
Policyholders can borrow from the cash value, but the loan is deducted from the death benefit if they die before it’s paid off. No cash value component.
Fixed premiums, regardless of market conditions. Premiums may increase with time, depending on the policy.
Could pay out annual dividends. Not eligible for dividends.

Is Whole Life Insurance For You?

Determining if whole life insurance is right for you depends on your financial circumstances and goals.

The reason behind the higher price tag is that whole life insurance also contains an investment component. Every time you pay your whole life policy premium, a portion of that goes into a tax-deferred account that builds up a “cash value.” As the cash value grows, you can borrow against it.

The ability to build cash value is often an attractive option if you’re looking for supplemental income or a financial safety cushion when you retire, says Huntley. However, he wouldn’t advise most buyers to purchase whole life insurance if they can help it.

“I don’t think it’s for the average Joe or Jane making $60,000 to $70,000 per year,” says Huntley. “The only way whole life makes sense is if you’re very wealthy and have a complex estate situation where you have a lot of assets.”

Some experts only recommend whole life policies as a good investment for people who have maxed out their 401(K), IRA, and Roth IRA options, and have a lot on the line when it comes to their estate. Whole life can be an attractive option for people who have a lot of disposable income and don’t want to worry much about life insurance after they purchase it. For one, your premium payments and the death benefit will remain the same for the entire life of the policy. This can be ideal for someone who prefers to keep their finances predictable but can be a dealbreaker for a potential buyer that prefers flexibility.

“A lot of businesses will fund retirement plans using whole life insurance because they can use the death benefit as ‘key man’ or ‘key person’ insurance while the employee or key executives are still working,” says Huntley. “The advantage being that when the employee leaves, they’ll have a cash value account that acts as a supplemental retirement plan for the owner of the business.”

While whole life insurance sounds good on paper, there are other options that can better fit your personal and financial goals.

The following permanent policies include a savings component and have their own set of rules that set them apart from traditional life insurance:

Types of Whole Life Insurance Policies
Universal Life Insurance Survivorship Life Insurance Variable Universal Life Insurance
Offers flexible premium options, often lower than whole life insurance but not as low as term life plans. Cash value components are dependent on market fluctuations, so there may be more risk involved. Covers two policyholders and pays off after the second individual’s death. Can be beneficial for families with special needs considerations, as the principal policyholder can include a Special Needs Trust in their estate plans. Your cash-value account can be invested in a number of sub-accounts. These can make profits when the market is doing well or incur losses when the economy is down.

Whole Life Insurance and Your Cash Value

Most people purchase permanent life insurance because of its ability to build up tax-deferred cash value over time. This can provide retirement income, college tuition funds, or mortgage payments for your beneficiaries.

Often you’ll start by paying a level premium, which means a higher percentage of your premium will go toward your cash value. As you continue to make payments and earn interest, the cash value will grow over time.

“Many whole life insurance companies also provide an additional benefit by giving you the opportunity to earn dividends,” adds Stafford. “While your policy’s guarantees provide you with a minimum death benefit and a certain cash value, dividends are usually not guaranteed but do give you the ability to receive an enhanced death benefit and increase your cash balance over time.”

If your policy includes dividends, you can apply those dividends to the policy to offset the eroding effects of inflation on the amount of coverage you’ve purchased.

While whole life has some perks, such as the potential to earn dividends and withdraw money when you see fit, it can be an investment that takes time to pay off. In fact, it can take anywhere from 10 to 15 years for policyholders to build enough cash to actually borrow.

“Whole life is a very convoluted product in the way that it grows, and in the way that it earns interest,” warns Huntley. “A lot of these policies don’t even break even for seven to 10 years due to the initial commission fee agents take out.”

Another consideration to keep in mind is that if you borrow money from your cash value and don’t pay it back before you die, that amount will be deducted from the death benefit. Additionally, all withdrawals are final and some can even be taxed if they are part of your investment returns.

Before borrowing from your cash-value account, watch out for the following:

Before You Borrow from Your Cash Value, Remember
Can Reduce Your Death Benefit Increases the Risk of the Policy Lapsing Cash Vale Accumulates Slowly
Some cash-value withdrawals may be subject to taxation. If you die without having repaid a loan against your cash value, the outstanding amount will be deducted from the death benefit. Loans and withdrawals can reduce the cash value and death benefit, increasing the chances of the policy lapsing. If you surrender your policy, there will be a surrender charge and you’ll have to pay taxes on any amount you receive that exceeds the premiums you’ve paid. Depending on your policy, it can take up to 10 years to build enough funds to borrow from your cash-value account.

How Much Does Whole Life Insurance Cost?

According to LIMRA’s 2020 Insurance Barometer study, half of Millennials believe that the estimated yearly cost for a $250,000 level-term life insurance policy for a healthy 30-year old is $1,000 or more when in reality it’s closer to $160 per year, which is only $13 a month.

“A common myth is that life insurance is expensive, when, in fact, it’s much more affordable than most think, especially if you’re young and healthy,” says Stafford. “That is why the best time to buy life insurance is yesterday, and the second-best time is today. The sooner you buy it, the sooner you lock in a lower premium.”

Stafford tells us some types of life insurance policies can be as affordable as a Netflix subscription, but your actual life insurance premiums will depend on the company you purchase the policy from, the type of coverage you choose, and any riders you add to your policy. For example, you pay more for whole life plans than for other types of life insurance policies because your premiums won’t increase over time and you’ll have a cash-value account.

While the idea of having lifelong coverage is certainly reassuring, whole life can be unaffordable for many life insurance shoppers. That’s why experts recommend talking to a financial planner and taking a careful look at all of your options.

Term life is an alternative for those looking for a high, albeit temporary, life insurance coverage amount for less. Premiums for term life insurance are based on your age, health, and when you choose to purchase or renew your policy. That means term plans feature lower premiums, especially if you purchase them earlier in life. However, according to the Texas Department of Insurance, some companies offer term plans up to a certain age, between 70 or 80.

Factors that Influence Insurance Premiums

Life insurance companies base the price of their policies on their unique underwriting guidelines, which means premiums for the exact same life insurance product can vary from one insurer to the next.

Some of the factors that affect life insurance premiums include:

  • Medical History – Pre-existing conditions or something like a history of cancer in your family.
  • Age and Gender – You’re more prone to develop medical conditions as you age. Women also tend to outlive men, so their premiums could be more affordable.
  • Hobbies – Practicing extreme sports like skydiving and rock climbing increase your risk of death and therefore your premiums.
  • Smoker Status – Your premiums could increase by as much as 20% if you smoke cigarettes or use tobacco (cigars, snuff, and chewing tobacco).
  • Occupation – Having a high-risk job, such as being a police officer or a firefighter, could also impact premiums.
  • Type of policy and Amount of Coverage – Term life is more affordable than permanent life insurance. The amount of coverage you purchase will also affect your premium.

FAQs About Whole Life Insurance

Do I need life insurance?

The question of who needs life insurance is very personal, but it can make all the difference if it means that your policy can financially safeguard a loved one, business, or charity you care about in the event of your death.

According to Stafford, some of the main reasons to buy life insurance include:

  • Parents – To ensure the financial wellbeing of children (fund education, build a trust for children with special needs, etc.)
  • Couples – To cover daily and future living expenses, such as mortgage payments, for a spouse or partner.
  • Seniors – To cover financial obligations, funeral costs, final expenses, and supplement Social Security Income.
  • Business owners – To ensure a family business continues to operate after the owner’s death or to cover debt related to the operation of the business, especially if it’s backed by assets such as a family home or the family needs to buy the shares of a partner.

What happens to your cash value in a whole life plan when you die?

One thing that draws individuals to purchase whole life insurance is the security behind lifelong coverage. So what happens when you die?

In the event of death, the cash value will return to the insurance company. Outstanding loans and past withdrawals from your cash value will be pulled from the payout to your beneficiaries. But there is a way around it, some policies allow you to purchase a rider that gives both the death benefit and accumulated cash value to your beneficiaries. Riders are additional terms or benefits that were not originally included in your policy. However, riders come with a cost, so you’ll pay more in annual premiums.

How much life insurance coverage do I need?

Your insurance needs will depend on your financial circumstances and goals. Some experts recommend purchasing between 10 and 20 times your gross annual income in life insurance coverage, but this calculation often doesn’t take into account factors like inflation. To better determine how much whole life insurance coverage to purchase, consult a financial advisor or a certified financial planner to go over your options.

Whole Life Insurance in a Nutshell

Life insurance isn’t for everyone. If you’re leaving behind loved ones or have a business or charity that you care about, it can provide a financial safety net to keep them going. Life insurance can fall into two categories: term or permanent life. Those seeking lifelong protection, are interested in investing in a tax-deferred cash-value account and can afford to pay a much higher premium may consider whole life insurance.

A whole life plan will guarantee your loved ones are taken care of in the event of your death, as long as the premiums are current. But it can have living benefits as well; should you accumulate a hefty cash value amount, you can borrow money from that account to cover expenses such as funding college tuition for a child, purchasing your first home, or having a nest egg for your retirement.

Before shopping for life insurance, consult a financial planner so they can help you determine if whole life insurance is right for you.

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Advertiser Disclosure

The purpose of this disclosure is to explain how we make money without charging you for our content.

Our mission is to help people at any stage of life make smart financial decisions through research, reporting, reviews, recommendations, and tools.

Earning your trust is essential to our success, and we believe transparency is critical to creating that trust. To that end, you should know that many or all of the companies featured here are partners who advertise with us.

Our content is free because our partners pay us a referral fee if you click on links or call any of the phone numbers on our site. If you choose to interact with the content on our site, we will likely receive compensation. If you don't, we will not be compensated. Ultimately the choice is yours.

Opinions are our own and our editors and staff writers are instructed to maintain editorial integrity, but compensation along with in-depth research will determine where, how, and in what order they appear on the page.

To find out more about our editorial process and how we make money, click here.

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