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By Gabriella Cruz-Martínez
Updated: February 23, 2021 10:51 AM ET | Originally published: February 22, 2021
Money; Getty Images

Whole life insurance is a type of permanent life insurance that provides a guaranteed death benefit while also gaining cash value you could use later in life.

Whole life offers “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, it’s also expensive, and the growth of your cash value depends on factors you can’t control, such as interest rates.

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Whole Life vs. Term Life Insurance

Whole life insurance is an alternative to term life insurance, a simpler life insurance product that only provides coverage over a specific number of years. 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, or as long as you keep paying your premiums. In contrast, most term life insurance lasts for a specified period of time — its term — though some companies offer term policies that are renewable annually.

Cost

Premiums for whole life policies won’t vary as long as you continue paying them. But term life premiums could change if you chose to renew the policy after its initial term expires.

The premiums for a whole life policy will likely be higher than term life, 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. Whole life costs more, in large part, because you are buying both a death benefit and an investment that builds cash value.

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 – This includes 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. The same goes if you have a dangerous job.

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).

Usually, a medical exam helps insurers measure your overall health and find risk factors. This is true for both term and whole life insurance.

But there are differences between term and whole life when it comes to re-insurability:

  • With term life, if you develop a terminal illness or a serious chronic condition you may not be able to renew your policy unless you paid extra for 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 your 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 provide a death benefit. But they also have what’s called “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 an income tax-deferred or tax-free basis. Depending on your policy’s fine print, you may withdraw or borrow part of that cash value or use it to pay your monthly premiums.

If you die 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 — 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 Worth It?

Whether whole life insurance is right for you depends both on your financial circumstances and your goals.

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 his or her finances predictable. A potential buyer that prefers flexibility may be better served with a universal life policy or a variable universal life policy.

Whole life insurance costs a lot more because of its investment component. Every time you make a premium payment on your whole life policy, a portion of your money goes into your tax-deferred account that builds 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 net when you retire, says Huntley. However, he wouldn’t advise that most buyers purchase whole life insurance if they can help it.

Who is Whole Life Insurance Best For?

“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.

In other words, 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.

“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 and appears to offer more peace of mind over term policies, there are other options that can better fit your personal and financial goals.

The following permanent coverage policies include a savings component and have their own set of rules that set them apart from traditional whole 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 buy permanent policies because of their ability to build tax-deferred cash value over time.

Used almost as an investment account, this could provide retirement income, college tuition funds, or mortgage payments for your beneficiaries.

How Whole Life Insurance Works

Often you’ll start by paying a level premium, which means a higher percentage of your monthly premium payments will go toward your cash value.

As you continue to make payments and earn interest, that amount of money (or 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 against.

“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 the estimated yearly cost for a $250,000 level-term life insurance policy for a healthy 30-year old is $1,000 or more. 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 insurer 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 the cash-value account.

While the idea of having lifelong coverage is certainly reassuring, whole life can be too costly 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 money. 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 can drive up premiums. Expect a medical exam or at least health questions to help insurers assess your health.
  • 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.

In short, the higher your chances of dying while covered by the policy, the more you’ll pay in premiums for the coverage.

FAQs About Whole Life Insurance

Do I need life insurance?

The question of who needs life insurance is very personal, but buying coverage could make a huge difference to your survivors if you died unexpectedly. Your policy could financially safeguard a loved one, business, or charity you care about after your death.

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

  • Parents – To ensure the financial well-being 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?

The idea of permanent coverage over your entire life attracts many whole life insurance shoppers. But what about the policy’s cash value? What happens to this account when you die?

In most cases, 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 this arrangement. Some policies let you add a rider that gives both the policy’s death benefit and its accumulated cash value to your beneficiaries. Riders are additional terms or benefits that were not originally included in your policy.

Riders come with a cost, so you’ll pay more in annual premiums.

Could I claim the policy’s cash value before I die?

Yes, a policy owner can claim a whole life insurance policy’s cash value by canceling the coverage. You can’t always claim the full cash value, especially early in the policy. Instead, you’d receive the policy’s cash surrender value.

Is whole life insurance a good investment?

The cash value of a whole life insurance policy resembles money in a savings account. The money is safe and secure, but it won’t earn the most impressive rates of return.

Life insurance cash value grows at an average rate of 1.5% annually. This return tends to be lower when interest rates are low, as they are now.

Whole life is attractive not because of its performance but because of its stability and its ability to serve as a tax shelter. Still, as Huntley says, you’re better off maxing out your 401(k) and IRA contributions before considering whole life insurance for its investing benefits.

What other forms of life insurance have a cash value?

Most forms of permanent life insurance build cash value. Universal life insurance is a popular alternative to traditional whole life. With universal life, the cash value isn’t guaranteed but it can also grow more quickly.

Rather than growing at the pace of a savings account, universal policies’ cash accounts can be tied to a stock index or be invested in mutual funds managed by the insurance company.

Universal life insurance has the potential to offer more flexibility. As the cash value grows, you could use it to lower the policy’s premiums later in life.

How much life insurance coverage do I need?

Your insurance needs will depend on your financial circumstances and goals.

Younger people who work, have dependents, large mortgages, and other debts need more financial protection. Usually, a term policy offers the most protection at the lowest cost.

But someone who doesn’t depend on income from work may have other ways to provide for his or her dependents after death. This insurance shopper may be attracted to a smaller death benefit that’s permanent — a whole or universal life insurance policy, for example.

To better determine how much life insurance coverage to buy, consult a financial advisor or a certified financial planner to go over your options — especially if you’re thinking about whole life insurance.

What are the best whole life insurance companies?

You’ll want a company with financial strength as rated by A.M. Best and other credit agencies.

Northwestern Mutual, New York Life, and State Farm top our list of the best life insurance companies.

You can get life insurance quotes online but keep in mind this is still a traditional business. Some of the best coverage requires dealing with an agent.

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 in case of your unexpected or accidental death.

Life insurance can fall into two categories: term or permanent life. Those seeking lifelong protection, are interested in investing in an income 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 whole life insurance, consult a financial planner so they can help you determine if whole life insurance is right for you.

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