What Is Whole Life Insurance?

Whole life insurance policy form with a pen and eyeglasses

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Life insurance is an important element in protecting your family’s financial stability. If you are like more than half of Americans in these unprecedented times, you are probably thinking about purchasing life insurance. At the start of 2020, 36% of Americans who didn’t own life insurance intended to buy it. Since the coronavirus pandemic, that number jumped to 53%, making finding a good life insurance policy important in these times. Life insurance companies offer many options, such as whole life, term, and even hybrid policy types that combine the two. Knowing what kind of life insurance policy to choose can be confusing. Understanding what whole life insurance is all about will help make the decision easier.

Unlike term life coverage, which is temporary, whole life is permanent, Whole life has a guaranteed death benefit and also provides a way to build savings through the policy’s cash values. Whole life allows you to budget better with set monthly premiums. It is also the kind of policy that allows you to borrow money from the cash value if you need it. When you insure yourself with certain life insurance companies, you can even become eligible for collecting dividends. Whole life has a lot of advantages. Here are the details to help you decide if whole life insurance is a good option for you, what it is, and how it works.

What Is Whole Life Insurance?

Whole life insurance is a permanent life insurance product that provides both a death benefit to your family (or beneficiary) and cash values that you can borrow from with protection that covers you for your “whole life” (as long as you pay the premiums). Whole life is but one of the life insurance options you can choose from. Others include term life (which only covers you for a limited time) and universal life (another permanent life insurance type). 

What We Like
  • Guaranteed death benefit

  • Ability to build an asset through cash values

  • Set premiums to help you budget

  • Lifelong coverage

  • Tax advantages

  • Some whole life policies make you eligible for dividends

  • You can borrow from the policy once it has accumulated value

What to Look Out For
  • Some companies offer different rates of guaranteed cash value growth

  • Using your cash values in different ways could have tax consequences

  • More expensive than term insurance

  • The death benefit or cash surrender value can be impacted by loans

Whole life insurance offers two key benefits:

  • A death benefit to be paid to the beneficiary in the event of your death
  • Cash value accumulated over the term of the insurance that can be used as savings or to be borrowed against if you need the money while you are alive

Whole Life vs. Term Life Costs

Whole life is a cash value life insurance policy that you can keep as long as you need. Whole life is more expensive than term life because, unlike term, it covers you up to your death, no matter how long that is, with a guaranteed payout of the death benefit (as long as you maintain the policy’s conditions). Term life is temporary. Term only provides coverage for a limited time and does not include any cash value. Therefore, the only way the term policy will payout is if you die within the limited term of the policy. Once a term life policy expires, there is no opportunity to get your money back. Because of this, you can expect the cost of a permanent life policy to be at least six to 10 times more expensive than term life. Prices will vary depending on your age, health, policy term, coverage features, and the life insurance company you choose.

When shopping for life insurance, you will have many options. It is always good to review them with a financial advisor to see what the best strategy is for you. For example, some people stack policies in order to help keep costs affordable. The idea is to purchase a whole life policy for the value of the coverage you think you will need for life (or whatever you can afford at the moment) and look into supplementing this with a term policy (which is less expensive) to cover costs you think you will only have for a limited time.

How Does Whole Life Insurance Work?

There are several types of whole life insurance, how each works will depend on:

  • The amount of coverage you want to purchase
  • Your age or health at the time of purchase
  • If you are willing to take a medical exam or not
  • How much coverage you want
  • For how long you want to pay the premiums

When you purchase a whole life policy, one of the advantages is that you can have a set premium, so it makes it easy to budget. The premium is based on your age, health, and amount of insurance at the time of purchase. You can decide to pay premiums for life, up to a certain age, or you can also take the option of paying premiums up in a shorter time period, like 10, 15 or 20 years, for example. There are many options available.

In a whole life policy, the premiums you pay go partially into the death benefit, and partially into a savings portion known as the cash value of the policy. With each payment, your cash values grow. Eventually, you will have enough in the cash value portion of the policy to borrow money from the policy if you ever need access to it. For example, emergency expenses, putting a down payment on a home, helping pay for children's education, or helping fund retirement.

A whole life insurance can help meet many needs. 57% of Americans have life insurance to help supplement retirement income, while 84% also have life insurance to help pay for burial costs or expenses, and 62% consider it to replace lost income. 

You can get a whole life policy by searching online for quotes, reading life insurance company reviews to find the best ones, or by speaking to an agent or financial advisor to help find the best product for your situation. Depending on whether you want to take a medical exam or not, or how much life insurance you need, there are two types of whole life insurance to consider. In both cases as long as you pay the premiums, the coverage lasts for life.

Guaranteed Whole Life: Guaranteed whole life is also known as final expense or burial insurance. If you have health issues or are a senior looking for life insurance, guaranteed whole life is a popular option because it does not require a medical exam. Guaranteed whole life is a type of whole life policy that offers limited amounts of insurance and in many cases provides instant acceptance online. Guaranteed whole life policies can provide coverage for amounts as low as $2,500 and typically max out by $25,000, although we have seen up to $50,000 available. The minimums and maximums depend on the life insurance company you choose. For example, Mutual of Omaha has a $25,000 maximum, compared to Transamerica which offers $50,000. Many guaranteed issue policies offer limited benefits in the first two years, this is referred to as a graded death benefit. There are guaranteed whole life policies that do not apply the graded death benefit.

Whole Life: Depending on your age and health you may be able to get a whole life policy by filling in a medical questionnaire, and if you pass the questions some life insurance companies will issue the policy without the need for a medical exam. This is called simplified issue or simplified underwriting. Coverage amounts for whole life policies that use simplified underwriting or a medical exam provide higher amounts of coverage that can go up to several million dollars (or more) depending on the insurer. The advantage of taking a medical exam if you are healthy is that you may qualify for preferred rates which will save you money and offer higher amounts of coverage.

When shopping for life insurance compare the features and benefits of different whole life policies. Ask about what riders are included in the policy, whether you can increase coverage amounts later in life without taking a medical exam, and if the policy qualifies for dividends. All these features can add up to a lot more value for you over the term of your life.

Benefits of Whole Life Insurance

Whole life insurance has many benefits. The advantages of a whole life insurance policy include:

  • A set premium that does not change as you get older or if your health changes
  • The ability to build an asset in the cash values
  • You may borrow money from your policy once you have built cash values
  • You can use the values in the policy later in life to supplement your retirement income
  • You may be able to use the savings portion of the policy to eventually pay your policy if you start early
  • Eligibility to collect dividends (only with some life insurance companies). For example, companies like New York Life, Northwestern Mutual, Mass Mutual and Guardian are all top-ranked life insurers that pay dividends.
  • The ability to lock in lifelong coverage with no future medical exams
  • Tax-saving opportunities while you are alive and tax savings for your estate

Optional Benefits of Whole Life Insurance

Optional benefits or riders on a whole life policy can extend your coverage to provide you with more value. Look for whole life policies that provide riders, here are some examples to look for when you compare options:

  • Living benefits that can help pay part of the death benefit to you in advance if you are critically ill, terminally ill or require long term care
  • Riders that pay your premium if you become disabled or have job loss
  • The ability to insure children or a spouse as add-ons to the policy
  • The ability to add coverage later in life without a medical exam, this allows you to lock in a good rate now with lesser coverage if you can not yet afford higher amounts of insurance, but add coverage later while locking in the price of the lower age you signed up at.

Key Takeaways

  • Whole life insurance provides a death benefit, tax benefits, and cash value that you can borrow from
  • Whole life policies are available with or without a medical exam
  • You can use a whole life policy to build savings and in some cases collect dividends
  • A whole life policy has set premiums that help you budget, you can pay them over a limited time period or spread them out for life
  • There are many whole life options, insurance companies provide different advantages and benefits, it is important to shop around and compare features

The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.

Article Sources

  1. LIMRA. "Facts About Life," Page 1. Accessed Oct. 1, 2020. 

  2. Mutual of Omaha. "Mutual of Omaha Announces New Guaranteed Plus Whole Life Policy With Funeral Planning Services." Accessed Oct. 1, 2020.

  3. Transamerica. "The Power of Preparation," Page 5. Accessed Oct. 1, 2020.