What Is Whole Life Insurance?

Rebecca Parson
Rebecca Parson

Rebecca Parson

Author

Rebecca Parson is a financial and tech writer with 10 years of experience writing about topics such as life insurance, commodities investing, and the SaaS industry. She has a master’s degree from Johns Hopkins University and a bachelor’s degree from the University of Mary Washington. Her writing has appeared at money.com, sacbee.com, cart.com, herodevs.com, blanchardgold.com, and more.

Brian OConnel
Brian OConnel

Brian O'Connel

Contributor

Brian O’Connell has been a contributing writer for U.S News & World Report since 2016. A former Wall Street bond trader and the author of two best-selling books; “The 401k Millionaire” and “CNBC’s Creating Wealth”, he has 20 years experience covering business news and trends, particularly in the business and financial sectors. He believes education is the best gift a financial consumer can receive – and brings that philosophy to every story he writes. His byline has appeared in dozens of top-tier national business publications, including CBS News, Bloomberg, Time, MSN Money, The Wall Street Journal, CNBC, TheStreet.com, Yahoo Finance, CBS Marketwatch, and many more.

By Rebecca Parson, Brian O'Connel
Author, Contributor, Life Insurance

Key Takeaways

  • Whole life insurance lasts for your entire life, unlike term life insurance, which is only for a set number of years (the term).
  • Whole life insurance offers cash value, an account to build up cash savings to later borrow or withdraw from.
  • The cash value’s interest grows tax-deferred, usually at a fixed rate.
  • Most whole life insurance policies have level premiums, which are premiums that never change in amount.
  • You can sell your whole life policy if you don’t need or want it anymore.

What is Whole Life Insurance?

Whole life insurance is a lifelong life insurance policy with cash value, a guaranteed death benefit, and level premiums. The interest on the cash value is tax-deferred. 

Whole life insurance policies are a type of permanent life insurance (called this because they cover you for your entire life). Other types of insurance in this camp are indexed universal life, variable life, and universal life.

If you’ve bought whole life insurance and don’t need or want it anymore, you can sell it in a process known as a life settlement.

How Whole Life Insurance Works

Whole life insurance guarantees a death benefit payout to your beneficiaries in return for consistent premium payments. Such a policy has a savings element called the “cash value” in addition to the death benefit. The savings grow interest on a tax-deferred basis.

Building cash value is a key component of whole life insurance. You can pay more than the required premium to build cash value — this is known as paid-up additions (PUA). You can also reinvest dividends into the cash value to earn interest. Over time, the combination of dividends and interest will generate a return greater than the total premiums paid.

As the policyholder, you can access the cash value by withdrawing money or taking a loan. Withdrawals up to the total premiums paid are tax-free, and loans are tax-free. The insurer will charge you interest on policy loans, but the rates are typically less than personal loan and home equity loan rates.

Whole Life Insurance Cash Value

The cash value in a whole life policy works similarly to a retirement account because it lets you earn tax-deferred interest on your cash savings.

A portion of each premium payment you make contributes to the policy’s cash value, which grows quickly while the insured is young but slows down as more of the premium is needed to cover insurance costs due to aging.

You can access the cash value by taking a loan against it or withdrawing funds through a partial cash surrender. Keep in mind, however, that this will reduce the policy’s death benefit.

Alternatively, you can surrender the entire policy to receive the available cash value, minus any surrender fees, or you can sell your policy to a third party.

Whole Life Death Benefit

The amount of a whole life policy’s death benefit is usually set from the beginning, but you can change it in some cases. You can use dividend payments to buy PUAs, which will increase the death benefit. If there are unpaid policy loans when you die, the insurer will subtract their amount from the death benefit your beneficiaries get.

You can set the terms of how the death benefit is paid out. For example, your beneficiaries can get it as a lump sum, in installments, or as an annuity. If it’s not paid out all at once, the death benefit will keep earning interest until it’s gone.

Pros and Cons of Whole Life Insurance

ProsCons
Lifelong coverageComparatively slow growth of cash value
Guaranteed death benefit sizeCostlier than term life
Can use cash value for withdrawals or tax-free loans
Level premiums

Advantages Explained

  • Lifelong coverage: Like other types of permanent life insurance, whole life insurance covers you until your death.
  • Guaranteed death benefit size: You choose an amount for your death benefit when you sign up for the policy, and it stays the same. This provides a guaranteed payout for your beneficiaries after you die.
  • Cash value: You can use the cash value you build up in the policy for withdrawals, premium payments, or tax-free loans.
  • Level premiums: The premiums are level, meaning they never change in amount, even as you age.

Disadvantages Explained

  • Cash value growth: Cash value may grow slower than the same amount of money invested in stocks or other types of policies.
  • Costlier than term life: Since whole life covers you for your entire life without increasingly expensive premiums, it’s more expensive than other types of life insurance.

How Much Does Whole Life Insurance Cost?

Whole life insurance’s cost varies depending on the coverage amount, your health, your age, and any riders you add but is typically several hundred dollars per month. Whole life insurance is more expensive than term life insurance.

Uses of Whole Life Insurance

As with other life insurance types, whole life insurance offers financial protection for individuals and their families if the policyholder dies. For households dependent on one person’s income, a whole life policy can provide financial stability if the main income provider unexpectedly dies.

However, unlike term life insurance, whole life can also act as an investment tool. Once the cash value builds up sufficiently, policyholders can withdraw or borrow against it to fund significant expenses, like purchasing a home. Additionally, some individuals use the cash value from a whole life policy to boost their retirement income during market downturns.

Types of Whole Life Insurance

Below are the main types of whole life insurance:

  • Level Payment: The premium amount will never change.
  • Limited Payment: You’ll pay a limited number of premiums. They will be larger than level premiums but you won’t have to pay them your entire life.
  • Single Premium: There’s one large premium at the beginning of the contract, which funds the policy for life.
  • Modified Whole Life Insurance: You pay lower premiums at the beginning of the contract and higher premiums later.

Whole Life Insurance Riders (Add-Ons) to Customize Your Policy

Some of the riders you can add to a whole life insurance policy include:

  • Accidental Death Benefit (ADB): If you die because of an accident, the ADB will provide a payout to your beneficiaries on top of your policy’s standard death benefit. An ADB usually ends at a certain age, often around 70 years old.
  • Chronic Care: If you add this when you buy the policy, you can use part of the death benefit to pay for the cost of long-term care. 
  • Disability Waiver of Premium: If you become disabled and can’t pay your premiums, this rider will pay premiums for you during the disability.
  • Living Benefit: This lets you use part of the death benefit to pay for treatment or care for a terminal illness.

Whole Life Insurance Policy vs. Term Life Insurance Policy

The key difference between whole life vs. term life is that whole life lasts your entire life, while term life only lasts for a certain number of years. This means that if you die after a term life policy is over, your beneficiaries won’t get a death benefit from the policy. Another difference is that whole life has cash value but term life doesn’t. 

Since whole life has more benefits, it’s more expensive than term life. Whole life premiums are usually level, meaning they stay the same for the entire policy. Term life premiums stay level until you renew the policy, at which point they increase.

Can I Sell My Whole Life Insurance Policy?

Yes, you can sell your whole life insurance policy; this is called a life settlement. However, you should know that whole life policies typically sell for less than universal life insurance policies. The reason is that buyers prefer the lower premiums of a universal life policy in its earlier years.

Selling a whole life insurance policy happens as follows:

  1. Consider your age and health. Generally, seniors above 65 with a life expectancy of less than 15-20 years can get desirable offers. 
  2. Gather all relevant policy documents.
  3. Get a life expectancy report. 
  4. Approach a licensed life settlement provider or broker who can guide you through the process, help you with the paperwork, and negotiate on your behalf with potential buyers. 
  5. Accept an offer.
  6. Transfer the policy.
  7. Receive payment.

It’s crucial to compare offers from different buyers to ensure you get the best price. Additionally, make sure to consider the tax implications of life settlements and discuss the process with a financial advisor before moving forward. 

Frequently Asked Questions About Whole Life Insurance

What Is a Whole Life Insurance Policy?

A whole life insurance policy is permanent life insurance with level premiums, cash value that earns interest, and a tax-free death benefit.

When Should I Buy Whole Life Insurance?

You can buy whole life insurance at any age, but it’s usually most worth the cost for people between 25 and 50 years old. After that, it may be too expensive to be worth it.

Can You Cash Out Whole Life Insurance?

Yes, you can cash out whole life insurance by surrendering it, which comes with fees, or selling it, which will get you more money than surrendering.

Who Should Consider Whole Life Insurance?

If you’re already maxing out your retirement accounts, have loved ones who depend on you financially, and want to earn low-risk interest on cash savings, then whole life may be a good choice for you instead of term life.

Which Is Better: Term Life Insurance or Whole Life Insurance?

Term life is better if you’re looking for low-cost coverage for a set number of years — for example, until your kids graduate high school or college. Whole life is better if you’re willing to pay more for lifetime coverage that builds interest-earning cash value.

Does Whole Life Insurance Earn Dividends?

Yes, whole life insurance earns dividends, which you can use to pay premiums, add to your cash value, or take out as cash.

How Much Is a $100,000 Whole Life Insurance Policy?

Rates vary depending on age and health, but a $100,000 whole life insurance policy usually costs several hundred dollars per month.

In Conclusion

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