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By Gabriella Cruz-Martínez and Andrea Agostini
Updated: July 21, 2021 1:42 PM ET | Originally published: July 13, 2021

Whole life insurance is a permanent life insurance policy that guarantees a fixed death benefit for the beneficiaries and a cash value savings component for the policyholder. Read our in-depth guide to learn the benefits of whole life insurance — and its potential downsides — to find out if it’s the best life insurance policy for you.

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How Does Whole Life Insurance Work?

Whole life insurance works as a permanent policy that builds cash value over time. As long as the premiums are current, the policy remains active for the entire life of the policyholder, and beneficiaries will receive a set death benefit upon the insured's death.

The insured pays fixed level premiums, which are allotted between several portions:

  • Partial funding for the policy’s face value (the death benefit)
  • The insurer’s operating costs, cost of insuring you, and profits
  • Contributions to the cash value account

What Does Whole Life Insurance Cover?

Death Benefit

  • Your beneficiaries are entitled to a tax-free, lump-sum death benefit at the moment of your passing
  • There are no use restrictions. A death benefit payout can cover costs associated with your death: estate planning, burial, funeral, and debt settlements
  • The amount doesn’t change during the policyholder’s lifetime, but if there are unsettled cash value loans after their death, the debt is deducted from the death benefit
  • The policy can expire at its “maturity date” – when the insured reaches age 100 or 120. What happens next varies. Some companies pay out the cash value and close the policy. Others grant policy extensions or nothing at all
  • The minimum coverage amount is usually $100,000, but many policies cover $1 million or more

Cash Value

  • A living benefit that works as a safe investment and savings account the insured can access throughout their lifetime
  • Cash value amount is “guaranteed,” meaning that the insurer pledges to uphold a minimum interest rate
  • Funded with a portion of the premium payments. The amount earns interest and builds cash value on a tax-free basis

Riders

Insurance riders enhance the coverage and modify the terms of a policy. For example, you can work around a policy’s “maturity date” by purchasing a “maturity extension rider” or access the death benefit while still living by adding an “accelerated death benefit rider.”

Eligibility

Eligibility is determined by age, gender, employment information, medical history, and lifestyle.

Insurers require a medical exam, but if you’d rather skip this step, some companies offer a no-exam life insurance alternative to the traditional underwriting process.

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What Is The Cash Value of a Whole Life Insurance Policy?

Most people buy cash value life insurance to build tax-deferred earnings. This living benefit works like a low-risk investment account, providing an extra source of income for retirement, college tuition, or emergency funding. There are, however, other options that might serve a similar purpose, such as an annuity.

A cash value account:

  • Grows slowly, but with guaranteed rates, regardless of market fluctuations
  • Earns interest on a tax-free basis as you continue making payments
  • Grows faster during the first years of the policy but slows down as you age since the cost of insuring you demands a larger portion of your premiums.
  • Stays with the insurance company when the policyholder dies — unless the policy includes a rider that states otherwise.

There are four ways to access cash value earnings:

  • Policy loans - A policy loan is tax-free and less restricted than other types of loans. The insurance company lends the money and sets up a flexible repayment plan with low interest rates. Your cash value earnings serve as collateral.
  • Withdrawals - Policyholders can withdraw directly from the cash value with partial cash surrenders. These are final and can reduce the death benefit payout. Withdrawals are taxable if they exceed the cumulative amount you’ve paid in premiums, and withdrawing the full cash value amount triggers a policy lapse
  • Surrendering the policy - Surrendering a policy cancels it and nullifies the death benefit. You receive the cash surrender value — whatever cash value is left after surrender charges and fees. Any cash surrender value that exceeds what you’ve paid in premiums is taxable.
  • Using it to make premium payments - You can use the cash value to cover monthly premiums and stop making payments out of pocket. It will take several years of high premium payments before this is possible, and if you empty the cash value account, the policy can lapse.

Dividend-paying whole life insurance policy

A “participating whole life insurance policy” can earn dividends on top of the guaranteed cash value and death benefit.

If and when the insurance company generates a surplus of profit, policyholders receive dividends as partial refunds of premium payments. They may use these earnings in several ways:

  • As a cash or check payout
  • As contributions to cash value account
  • To make advanced premium payments
  • To purchase additional coverage

Before borrowing from your cash-value account, remember:

  • Mismanaged cash value loans can lapse your policy, nullify tax-exempt status and reduce the death benefit
  • Withdrawals and loans that exceed the cash value amount will be subject to taxation
  • Withdrawals and outstanding cash value loans will reduce the death benefit payout to your beneficiaries
  • Policy loans and withdrawals increase the risk of policy lapsing
  • Due to its low annual growth rate, it can take up to 10 years to build enough funds before you can actually borrow

How Much Does Whole Life Insurance Cost?

Whole life insurance rates are considerably more expensive than other types of life insurance. It can cost up to 10 times more than term life insurance.

Premiums range from $40 to $300 monthly, but these ultimately depend on:

  • Your individual profile
  • The company’s underwriting guidelines
  • Insurance policy type
  • Coverage amount
  • Any riders you purchase

Some policies offer an optional clause called a waiver of premium, which, as the name says, waives premium payments if the insured person becomes critically ill or disabled

Whole life insurance premiums are based on:

  • Age and gender – The younger you are, the lower your premiums will be. Premiums for women also tend to be more affordable than for men
  • Medical history – Insurance companies look at your own medical history and your parents’. Pre-existing conditions or family history of chronic conditions will drive up premiums. Expect a medical exam or health questions to assess your health
  • Smoker Status – Your premiums could increase by as much as 20% if you smoke cigarettes or use tobacco (cigars, snuff, and chewing tobacco)
  • Hobbies – Practicing extreme sports like skydiving and rock climbing raises premiums
  • Occupation – Working high-risk jobs (ex. police officers, construction workers, pilots, and firefighters) impacts insurance premiums
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What Type Of Life Insurance Policy Is Right For You?

Life insurance products are split into two types of coverage: term and permanent policies. The choice ultimately depends on what you can afford and what you want out of life insurance. Take a careful look at every life insurance option available and, if needed, consult a financial advisor before settling on one.

Term life insurance is a simple product with just three types of policies. It works for people looking for high, affordable coverage for a limited number of years. On the other hand, whole life insurance is one of the multiple types of permanent life insurance that offer lifelong coverage and cash value earnings:

  • Universal life insurance
  • Variable life insurance
  • Variable-universal life insurance
  • Survivorship life insurance
  • Single premium life insurance

Whole Life VS Term Life Insurance

Here’s how both policy types compare:

Pros
  • Lifelong coverage
  • Fixed premiums
  • Investing component
  • No expiration date
  • Potential to earn dividends
  • Cash value loans or withdrawals
  • Loans and withdrawals have no use restrictions
Cons
  • High premiums
  • Slow rate of return on investment
  • High initial commission fees
  • Takes 10-15 years for policyholders to build enough cash value for a loan
  • Cash value does not go to beneficiaries
  • Withdrawals may be taxable income
  • Outstanding cash value loans are deducted from death benefit payout
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People who benefit from whole life insurance

Whole life insurance works for people that want long-term protection and can afford the high premium rates:

  • Parents – To ensure your children's financial well-being (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
  • Older adults – To cover financial obligations, funeral costs, final expenses, and supplement Social Security Income.
  • Business owners – To ensure the operation of a business after the owner’s death or to cover debt related to operations, especially if it’s backed by assets (like a family home) or the family needs to buy out a partner
  • People who need estate planning – To help your loved ones cover estate taxes, asset management and other death-related expenses in case of the policy owner’s unexpected or accidental death.
  • Businesses that need to insure a “key employee” – To buffer any financial setbacks after the loss of an essential employee

People who don’t benefit from whole life insurance

Life insurance is a welcome safety net for anyone, but purchasing a whole life policy is not always the best choice for:

  • People in average income brackets - Expensive premiums are not compatible with average wages. People who work, have dependents, large mortgages, and other debts are best served by term life insurance
  • Older adults who need to boost their retirement - Older adults should look for the best life insurance for seniors before considering a whole life policy. The cash value will grow at a very slow rate, and you will pay extremely high premiums without seeing much returns.
  • Buyers looking for investment opportunities - Focus on maxing out your 401(k) and IRA contributions before considering whole life insurance for its investing benefits. A policy’s cash value earnings resemble money in a savings account: tax-free, secure, and stable, but it won’t earn impressive rates.
Whole Life Insurance FAQ
What is whole life insurance?
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A whole life policy is a permanent cash value life insurance that offers a death benefit and a cash value component, the latter of which grows and earns interest over time. The policy does not expire if payments are up to date. Premiums are more expensive than term life insurance, but they won't change during the policy's lifetime, and the death benefit is guaranteed.
What is the difference between term and whole life insurance?
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Whole life insurance guarantees lifelong coverage with a cash value component, fixed death benefit, and set premium prices. It may also pay out annual dividends. Whole life insurance premiums are significantly higher than term life. Term life insurance offers a death benefit for a limited period of time, but the death benefit is lost if the policy owner outlives the term (10-130 years). This type of policy offers significantly lower premiums, but they may increase with time. There is no cash value component and it is not eligible for dividends.
How much life insurance coverage do I need?
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The general advice is that you purchase a policy that covers up to 10 to 15 times your annual income, but it may be more if you have dependents, particular financial circumstances, and goals. Use an online life insurance calculator to get a better estimate. Calculations are based on your income, savings, estimated burial costs, the number of dependents, and how much they need to survive for a set number of years. You can also consult a financial professional to go over every insurance product option — especially if you're thinking about whole life insurance.
What are the best whole life insurance companies?
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The best whole life insurance companies should have good 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, so some of the best coverage requires speaking directly with an insurance agent.
Does COVID-19 affect my whole life insurance policy?
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Insurance companies legally cannot change the terms of an active policy, so even if you get COVID-19 or are at a high exposure risk, the policy's coverage won't change, and premiums will remain the same. If the policy is active and you die from coronavirus-related complications, your beneficiaries will still be entitled to the full death benefit. COVID-19 survivors looking to purchase a policy may need to provide additional medical records and evidence of recovery. New applications are also experiencing longer wait periods and higher life insurance rates. COVID-19 may also affect the insurance underwriting process in the future, as companies study the data on the long-term consequences of the virus. This could result in higher life insurance quotes for COVID-19 survivors, but nothing is set in stone yet.

Summary of Money’s Guide to Whole Life Insurance

Pros
  • Lifelong coverage
  • Fixed premiums
  • Investing component
  • No expiration date
  • Potential to earn dividends
  • Cash value loans or withdrawals
  • Loans and withdrawals have no use restrictions
Cons
  • High premiums
  • Slow rate of return on investment
  • High initial commission fees
  • Takes 10-15 years for policyholders to build enough cash value for a loan
  • Cash value does not go to beneficiaries
  • Withdrawals may be taxable income
  • Outstanding cash value loans are deducted from death benefit payout