What Is Whole Life Insurance?

Whole Life Insurance Explained

Whole life insurance policy form with a pen and eyeglasses
•••

leminuit/E+ / Getty Images

Whole life insurance is a policy that is with you until your death. When you die, it pays your beneficiaries the amount stated in the contract. This differs from term life insurance in that term only lasts for a set amount of time, usually ending at a set age.

At the start of 2020, 36% of people who didn't have life insurance intended to buy it. In May, that number jumped to 53%. In 2021, a Life Insurance Marketing and Research Association (LIMRA) study again found that 36% of uninsured people wanted to buy life insurance.

Here’s more about whole life insurance to help you decide if it is a good option for you; also, it helps to know how it works.

Definition and Examples of Whole Life Insurance

Whole life insurance is a type of insurance that guarantees payment upon your death. The beneficiary you choose receives the money as long as you maintain the terms of your contract until your death.

The payments you make on your whole life policy should remain the same for life. This makes it easier to plan and budget for your monthly payments. Your monthly payments also help pay for your death benefit while the money in the policy builds interest. Since whole life policies remain with you for life, your monthly payments can be much more than a term policy.

  • Alternate name: Cash Value Life Insurance

How Does Whole Life Insurance Work?

Before you apply for the insurance, make sure you're using a trusted provider. When you apply, you may need to have a medical exam done; the agency might also ask to access and review your medical records. It may also ask for your parent's medical history and your financial information. You’ll be given options, features, and payment terms to choose from during the application process. Once you're finished, it might take four to six weeks to hear back from them.

After the records and medical reviews, the insurance company will let you know how much they are willing to give you. Then, they set your monthly premium (price you’ll pay), which should be the same over the course of the contract. Your monthly payment is based on your age, health, and the amount your beneficiaries will be paid. It shouldn't change as you age or if your health declines.

Part of your monthly payments covers the policy’s death benefit (the amount paid) at your death. The other part goes into the savings portion called the cash value.

Medical Exam

Some life insurance policies require “full medical underwriting.” This means you'll need a full medical exam that includes lab work. After this, you may end up waiting for a month or more to hear back from the agent.

You may be able to get a whole life policy by filling out a medical questionnaire. This is much easier than going through a full medical review, but whether you can do it this way depends on your age and how good of health you're in. If the agency is happy with your answers, they will issue the policy without the need for a medical exam. If not, you'll be asked to have an exam done. Skipping the exam is called simplified issue or simplified underwriting

When buying insurance, ensure that your policy doesn’t have a limited payout in the first two years. This might reduce what you intend to leave to your family.

A simplified issue makes it easy and quick to apply for insurance, but it might cost more. If you’re young and healthy, you can get a much better rate by taking the medical exam and getting full medical underwriting.

Whole life is unique in that part of your monthly payment goes into a tax-deferred savings portion known as the “cash value.” This amount grows over time at a low rate of return. Your payments and the interest paid on the cash value amount are what make it grow. Once you have enough in the cash value to be used, you can draw against it as a loan while you’re alive.

Here’s how it works. Once you’ve paid into your policy for some time (around two to five years), the cash value will be enough for you to borrow against tax-free. A few words of caution are warranted when thinking about using the cash value; you’ll pay interest for the loan (much like you do with other loans); if you borrow and don’t repay the full amount, it may be deducted from the death benefit.

You could also use the cash value to make your monthly payments in later years. Some policies might even allow you to put it toward a higher death benefit. Some policies might let you access the entire cash value; you may need to surrender the policy to do this. Think of surrendering a policy as canceling it and taking its value in cash after fees and penalties.

If you surrender the policy, you’ll lose the death benefit you signed up for. You might also owe taxes on the amount you receive.

Most plans include a “surrender charge,” unless you found a plan that doesn't have this type of penalty. 

Upon your death, the insurance company keeps the cash value and pays the death benefit. It might be paid as a lump sum, in interest, or in smaller installments. In most cases, if you want to leave a million dollars to your children, an insurance plan’s death benefit isn’t considered taxable income for the person receiving it. This is true for both term and whole life insurance plans.

Types of Whole Life Insurance 

Most whole life plans have the same goal—to cover you for your whole life. However, there are many types of whole life policies. Three of the most common options are: 

  • Participating/non-participating whole life insurance: Certain insurers offer “participating” plans, in which you could receive dividends. If there are dividends, they are based on annual profits, which may vary. Nonparticipating plans don’t offer dividends. 
  • Guaranteed whole life: Coverage is usually limited (typically to $25,000 but sometimes up to $50,000), but it doesn’t require a medical exam. This is potentially helpful if you have health issues or are an older person looking for life insurance. It is also called final expense or burial insurance
  • Children’s whole life: These are low-cost policies designed for children. Age ranges vary, with many policies only available to kids 17 and under. Some policies might cover younger people into their 20s. The policy might not expire, and the cash value can be used to help pay for college. 

Within the buckets of participating and nonparticipating whole life plans, you may come across options on the payment structure. How the company disburses your money can affect how much you pay for the coverage.

  • Indeterminate premium whole life: Unlike many other whole life plans, the monthly payments for this type may change, though they won't go past a set amount. 
  • Limited payment whole life: Premiums (usually higher) are paid over a shorter period. 
  • Single premium whole life: The premium is paid upfront, in one payment.

Who Needs Whole Life Insurance?

People buy whole life insurance for many reasons. Some of the most common reasons are replacing lost income for beneficiaries after death or to help pay for funeral costs. 

Whole life might be a good fit if you want long-term coverage and have a stable cash flow that allows them to pay premiums. You'll also need to ensure you have your emergency fund and regular retirement contributions set up. When you're setting it up, try to find a way to use up the entire cash value or death benefit without leaving any money left over. 

Whole life may not be a good fit if you have short-term insurance needs. If you have a small budget or don’t want whole life insurance or the cash value, whole life might not be a good choice. Instead, you could look into term insurance and investing in tax-deferred retirement accounts, low-cost index funds, bonds, or other options. If you're single and have no children, you may not need life insurance at all unless you want to leave money to a family member or friend.

Cash Value and Whole Life Insurance

Prices will vary with your age, health, the policy's term and features, and the company you choose. Like other types of insurance, the costs could increase if you add riders. Riders are extras you can buy to cover other incidents, such as a disabling injury, or paying for the ability to add to the death benefit later without taking a medical exam.

If you take a medical exam for life insurance while young and healthy, you may qualify for preferred rates. These rates can save you money and make higher amounts of coverage available.

Whole Life Pros and Cons

Pros
  • Dependable premium payments

  • Lifelong coverage

  • Guaranteed benefit at death

  • Tax advantages

  • Dividends may be available with some insurance companies and plans

Cons
  • Guaranteed cash value may not be as competitive as investing

  • Restrictions on accessing cash value

  • More expensive than term insurance

  • Complex plan options, which can be confusing

Pros Explained

  • Dependable premium payments: Your monthly payments shouldn't change as long as you have the policy.
  • Lifelong coverage: The policy covers you for your whole life, thus the name "whole life."
  • Guaranteed death benefit: The policy is required to pay out the total amount you are paying for.
  • Tax advantages: The principal portion of the death benefit is usually not taxed, so the people you leave it only pay taxes on any interest.
  • Dividends: Some policies provide dividends to policy holders.

Cons Explained

  • Cash value: The cash value may not increase in value as much as investing in a mutual fund or other investments.
  • Restrictions: Your only options for accessing the cash value are to take out a loan or surrender the policy.
  • Costs: Costs are much higher for whole life policies than for term life.
  • Complexity: Plans can be complicated and hard to understand for people who are not insurance experts.

Sample Whole Life Insurance Costs

Examples of Whole Life Insurance Monthly Rates for Women
Age $250,000 $500,000 $1,000,000
30 $227 $448 $888
40 $325 $643 $1,278
50 $484 $960 $1,914
Source: Quotacy
Examples of Whole Life Insurance Monthly Rates for Men
Age $250,000 $500,000 $1,000,000
30 $259 $511 $1,015
40 $374 $741 $1,477
50 $567 $1,128 $2,249
Source: Quotacy

Key Takeaways

  • Whole life is more expensive than term life but offers lifetime coverage.
  • Whole life insurance provides a death benefit, a “cash value” that acts like tax-free savings. The right plan can also produce dividends.
  • Whole life policies may or may not require a medical exam.
  • Taking a medical exam can lower your costs if you are healthy.
  • Set payment premiums can help you budget.