What is Whole Life Insurance?

Whole life insurance is a life insurance policy that covers an insured individual when they die—whether at age 18 or 98. Whole life insurance typically comes with two components: a life insurance component and an investment component that gains value over time (called a cash value). We’ll get into more detail on that later.

What’s the difference between term and whole life insurance?

There are a few differences between term and whole life insurance policies. Term life insurance is only around for a specified amount of time (10, 20, or 30 years, for example). Whole life insurance is around as long as you are, supposing you pay your monthly premiums. Whole life policies also have a cash value component that sets it apart from term.

Term policies are far cheaper, but they’re far less permanent also. To see which may be a better fit for you, read our Term vs. Whole Life Insurance article.

Are there different types of whole life insurance?

A whole life policy is actually a subcategory of permanent life insurance, which is life insurance that doesn’t usually expire. Other types of permanent life insurance include variable life, universal life, and variable universal life (yes, really). But among all permanent life insurance categories, whole life tends to be the most popular.

There could be a few variables or differences between whole life policies, including the following:

  • Participating whole life insurance: A policy that can pay dividends, based on the financial performance of the insurance company.
  • Non-participating whole life insurance: A whole life policy that doesn’t pay dividends, period.
  • Level premium whole life insurance: With a level premium whole life policy, your premium stays constant for the life of the policy.
  • Single premium whole life Insurance: Sometimes known as a “paid up” whole life policy, you pay one huge premium up front for a policy, and it remains in effect until you pass away. Sometimes people choose a single premium policy for tax-deferred estate planning, for inheritance reasons, or to draw from the cash value years later (such as during retirement).

And much more. With how complex permanent life insurance tends to be, you can bet this financial product comes in many flavors.

How does whole life insurance work?

Whole life insurance takes a life insurance policy and a tax-deferred savings account (cash value) and bundles it into one plan.

Life insurance component:

On the insurance side of whole life insurance, the policy typically covers the insured party for their whole life and provides a death benefit (or payout) to the beneficiary once the insured dies. The premiums and death benefit for whole life policies are level most of the time, but that’s not always the case.

Just like other life insurance products, many providers require a medical examination (bloodwork, physical, etc.) before issuing a whole life policy. There are companies that don’t require an exam, although the policy may be more expensive. See our review of the best no exam companies.

Cash value component:

On the savings side of a whole life policy, part of your premium goes into an account that accumulates value at a specified rate (typically a fixed rate), tax-free. You can borrow from this savings account, which is known as a policy’s cash value.

Cash value is like a credit limit. With a credit limit, you can borrow up to whatever your credit limit may be. The same is true with a cash value. You can borrow from your cash value (usually at a low interest rate), and you don’t even necessarily have to pay it back—but if you don’t, that amount gets subtracted from your death benefit. So you’re essentially borrowing money from the inheritance of your loved ones unless you repay it. Still, it can be a handy option if you need cash.

Additionally, if for some reason you can no longer make premium payments, you can surrender your policy and take the cash value—although that comes with a whole host of charges, fees, and even taxes, so it’s not recommended. If you’re concerned about making payments down the line but still like permanent insurance, universal life insurance is worth checking out. Universal life is permanent insurance and contains a cash value component, but it also has unique features such as flexible premiums.

Does cash value increase the death benefit payout?

The cash value of a policy does not get added to the death benefit. The cash value exists primarily for the person who owns the policy, and it doesn’t usually benefit the beneficiary. So, for example, a $50K whole life policy with a $50K cash value doesn’t equal a $100K death benefit for your beneficiary. If you pass away with a $50K whole life policy and $50K of cash value, the cash value no longer exists and your beneficiary would receive a death benefit of $50K—not $100K.

This cash value component can be very handy, but it’s also complex. If you’re considering a whole life insurance policy, make sure you read and fully understand it before you sign anything!

How much is whole life insurance?

Because it’s designed to last your lifetime, whole life insurance is significantly more expensive than term life insurance—sometimes six to ten times as much! So if you’re considering a whole life policy, make extra sure that you can consistently pay the premiums.

Here’s a whole life insurance chart with examples of what it might cost you:

Whole life insurance for a healthy 25-year-old

Death benefit Male monthly premium Female monthly premium
$100K $70 $64
$250K $145 $128
$500K $285 $251
$1M $560 $492

Sample quotes based on data from a TermLife2Go partner and are for illustration purposes only. Rates are rounded to the nearest whole number. Actual quotes may vary. Data effective 7/18/19.

Whole life insurance for a healthy 50-year-old

Death benefit Male monthly premium Female monthly premium
$100K $187 $163
$250K $397 $355
$500K $790 $705
$1M $1,596 $1,401

Sample quotes based on data from a TermLife2Go partner and are for illustration purposes only. Rates are rounded to the nearest whole number. Actual quotes may vary. Data effective 7/18/19.

As you can see, it’s not cheap, but whole life insurance provides more benefits and coverage for more years than term life.

Is whole life insurance taxable?

The death benefit of whole life insurance isn’t usually taxable, making whole life policies a popular investment for families who want to leave an inheritance and—with the help of a savvy financial adviser—avoid estate taxes.

The cash value also grows in a tax-deferred account for the duration of the policy. This tax-sheltered account provides financial options later in the life of the policy, when the policyholder is also later in his or her life. By this time, the cash value should have grown to a sizeable amount, and becomes a source of money to supplement retirement income or pay for long-term care.

Should I buy whole life insurance?

There’s no doubt, whole life policies are expensive. Many people may be better off buying term life insurance because it has lower rates. But there are a few instances where whole life insurance may be worth considering:

  • If you want to leave an inheritance without tax implications
  • If you’ve already maxed out your tax-deferred retirement accounts and want another savings account to draw from in retirement
  • If you want to pass down your business to one child and, without liquidating part of the business, leave an inheritance to another child
  • If—most importantly—you can afford it

If any of these statements apply to you, a whole life policy may have benefits you’d be interested in. If this is you, be sure to see which companies offer the best whole life policies.


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