Why are whole life insurance rates so high?

Whole life insurance is a permanent policy with exceptionally high premium rates. But does the policy’s cash-value make the cost worth it?

Nupur GambhirPat Hanzel

Nupur Gambhir & Patrick Hanzel

Published November 15, 2019

KEY TAKEAWAYS

  • When you pay your life insurance premiums, a portion of those funds goes toward the cash value of the policy

  • The cash value of a whole life insurance policy can be used to accumulate tax-free savings but accessing those funds has a few key risks

  • Term life insurance is a cheaper option than whole life insurance, though it does not include a cash-value and it expires

  • Most people don’t need a whole life insurance policy, but someone with a high net worth or dependants with special needs might

There are many different options when it comes to finding the right life insurance policy to financially protect your loved ones when you die. Whole life insurance is a life insurance policy that lasts your entire life, even though you only have to pay premiums until a certain age or for a certain number of years. The policy is permanent, and its premiums are typically more expensive than term life, which is a policy that only lasts until a set expiration date.

In this article:

How does whole life insurance work?

When you die, whole life insurance will pay out a death benefit to your family or other beneficiaries to ensure their financial security. The payment for a whole life policy is often between $100,000 and $5 million, but that depends on your financial needs.

Each month, a certain portion of the premium you pay will go into a tax-deferred savings account that functions similarly to an investment account, called the cash value. The exact amount that goes into savings is determined by your individual policy. With its annual dividends, the cash value and death benefit grow over time.

What can you do with a whole life insurance policy’s cash value?

As your whole life insurance policy accumulates cash value, you can access the funds in a few different ways — each with its own reservations and risks.

  • You can withdraw tax-free money. Though, if you surrender your policy or it becomes void, the money you have withdrawn will be considered taxable income.
  • You can take out a loan. You’ll usually be able to do so with low-interest rates, but you will be borrowing against your policy and will accrue interest until you pay the loan off. Your dependants would also lose a part —or all — of the death benefit if you die before you’ve paid the loan back. Any amount you still owe will be deducted from the benefit to pay off the loan.
  • You can surrender your policy and collect the cash value you’ve accumulated. The cash value of your policy will usually take two or three decades to grow, so if you surrender the policy early on, you’re unlikely to have accumulated much cash beyond what you’ve already paid.

The cost of whole life insurance compared to term life insurance

Term life insurance lasts for a set period; usually anywhere from five to 35 years. It also lacks any additional components (like a cash value) and is generally a lot cheaper than whole life insurance.

The permanent nature of a whole life policy, alongside its cash-value and finite payment structure, tends to make it much more expensive than term insurance.

How much more? Over a comparable period of time, a healthy 30-year-old male would pay $122 per month for $100,000 of whole life coverage when he could be receiving $500,000 of coverage for $24 per month with a term life policy.

The graph below shows the comparatively low prices for a 10-year term life policy across age and gender.

AGE $250,000$500,000$750,000$1 MILLION$2 MILLION
20Male$11.43$17.27$23.54$27.69$49.93
Female$10.25$14.18$18.70$22.36$40.07
30Male$11.43$17.20$23.54$27.52$49.93
Female$10.38$14.18$18.70$22.36$40.07
40Male$14.53$23.06$32.08$38.69$71.57
Female$13.08$20.16$27.73$32.09$59.19
50Male$30.30$54.23$78.03$94.94$184.79
Female$25.24$43.93$62.73$78.16$151.32

When you compare this to the annual cost of whole life insurance below, you’ll see that premium payments for a whole life policy are a lot higher. Keep in mind that when purchasing a whole life insurance policy, the insurer will set up quotes based on paying your premiums until you’re 65, 99, and 121.

You’ll spend more money each year for a policy that is paid up to age 65 because the premium payments would end earlier in life and are packed into a shorter period. You’ll spend the least amount of money annually if you purchase a policy that pays premiums until you are 121 (theoretically) because you have more time to pay off the policy.

Whole life premium rates payable until age 65

Rates are for a male with a Preferred (nonsmoker) classification, for $100,000 in coverage and no optional riders.

AGESMONTHLYYEARLY
20$85.45$995.55
30$122.20$1,423.65
40$196.25$2,286.00
50IneligibleIneligible

Whole life premium rates payable until age 99

Rates are for a male with a Preferred (nonsmoker) classification, for $100,000 in coverage and no optional riders.

AGESMONTHLYYEARLY
20$73.47$856.00
30$99.14$1,155.00
40$144.89$1,688.00
50$223.94$2,609.00

Whole life premium rates payable until age 121

Rates are for a male with a Preferred (nonsmoker) classification, for $100,000 in coverage and no optional riders.

AGESMONTHLYYEARLY
20$58.45$681.00
30$82.06$956.00
40$122.91$1,432.00
50$180.16$2,099.00
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High whole life insurance premium payments explained

Whole life insurance’s high premiums come with the territory; permanent life insurance policies tend to be costlier than term policies. Your policy premium’s actual rates will be determined by the life insurance classification you fall into. There are four life insurance classifications:

  • Preferred Plus
  • Preferred
  • Standard Plus
  • Standard

The type of life insurance classification you receive is based on the following variables:

FACTORCLASSIFICATION
AgeThe older you are, the more you will have to pay for life insurance.
Height and weightInsurance companies look at your height and weight to see if you fall into a healthy or risky range.
Medical examYour examiner will determine your health status. Any medical conditions, prescriptions, surgeries, diagnoses, or mental illness will be evaluated to determine your level of risk.
LifestyleDangerous hobbies, such as scuba diving or skydiving, or a risky job will put you in a lower life insurance classification.
Tobacco usePossibly the most important factor, smokers receive the lowest health classification and the most expensive life insurance premiums regardless of health or other lifestyle factors.
Criminal historyA felony on your record can warrant you for a poor life insurance classification, depending on how long after the charge you apply.
Substance abuseA few beers won't affect your insurance premiums, but insurers will look to see if you abused drugs or alcohol.
Family historyFamily health history can be an indicator of future risk and could affect your life insurance classification.
RidersAdding a rider to a life insurance plan provides additional coverage, but at the cost of higher premiums.

The premiums are exceptionally high for whole life insurance because the policy lasts your entire life, although you only pay premiums until a certain age or for a certain number of years. Unlike other forms of life insurance, you retain coverage even when your premium payments are over.

People who want to expedite the payment process can purchase a type of whole life insurance called “10 Pay” or “20 Pay” life insurance, where you pay for 10 years or 20 years, respectively, and your premiums could be as high as $2,000 per year. These policies are mostly useful only to people who have a disposable income over that period and want an additional tax-advantaged savings account because they maxed out all their other options.

10 Pay whole life insurance rates

Rates are for a male with a Preferred (nonsmoker) classification, for $100,000 in coverage and no optional riders.

AGESMONTHLYYEARLY
20$169.09$1,970.00
30$238.79$2,782.00
40$337.58$3,933.00
50$470.97$5,487.00

20 Pay whole life insurance rates

Rates are for a male with a Preferred (nonsmoker) classification, for $100,000 in coverage and no optional riders.

AGESMONTHLYYEARLY
20$110.93$1,292.35
30$145.44$1,694.40
40$210.49$2,452.30
50$311.59$3,630.15

Whole life insurance compared to other permanent life insurance policies

Whole life insurance is one of many permanent life insurance policies. Check out the chart below to see how it stacks up against universal life insurance and guaranteed universal life insurance.

WHOLE LIFE INSURANCEUNIVERSAL LIFE INSURANCEGUARANTEED UNIVERSAL LIFE INSURANCE
No-lapse guarantee.Your policy will be in effect as long as you make premium payments.YesNoYes
Cash-value accumulation.Your policy accumulates a cash value that can be withdrawn or used as a loan.YesYesNo
Paid-up at a specific age.You only need to pay premiums up to a certain age.YesNoYes
Benefit amount increases.Your policy's cash-value interest can be added to the death benefit.YesNoNo

Universal life insurance

Universal life insurance is the least expensive type of permanent life insurance. Your premiums support the death benefit, and any additional funds go toward the cash value, which can accrue a variable interest that fluctuates with market trends.

If the interest rate goes down — that is, if it costs the life insurance company more to maintain the cash-value account — then your premiums could go up. Conversely, if interest rates go up — if it costs the insurer less to cover the cash-value account — your premiums could go down.

This is why a lot of people see premiums increase as they get older. (Since the 1980s, interest rates have fallen from as high as 10% to as low as 3%.) If a policyholder can no longer afford his or her premiums and stops paying them, the policy lapses — the premiums may be deducted from the cash-value account until there’s nothing left, and the policyholder will have lost the coverage he or she had been paying for decades.

Universal life insurance premium payments

Rates are for a male with a Preferred (nonsmoker) classification, for $100,000 in coverage and no optional riders.

AGESMONTHLYYEARLY
20$36.19$434.38
30$42.00$504.00
40$62.74$752.93
50$89.50$1,074.09

Guaranteed universal life insurance

Guaranteed universal life insurance is pretty similar to universal life insurance, aside from the fact that the interest rate is agreed upon when you sign up for the policy, keeping the premiums the same throughout the policy regardless of broader market trends.

Guaranteed universal life insurance premium payments

Rates are for a male with a Preferred (nonsmoker) classification, for $100,000 in coverage and no optional riders.

AGESMONTHLYYEARLY
20$45.70$548.38
30$54.00$648.01
40$65.17$782.03
50$94.58$1,135.00

Are the costly premium payments for whole life insurance worth it?

A whole life insurance policy probably isn’t for the average person, but there are reasons that someone would want to pay the costlier premiums.

As Patrick Hanzel, Policygenius’ Advanced Planning Specialist and Certified Financial Planner, explains, "It's typically a good option to consider if you have significant annual income or assets, complex estate planning needs, or a special needs dependent."

An individual with a high net worth who has already maxed out other savings accounts could use whole life insurance as an additional estate planning resource, making the high premium costs worthwhile.

Individuals who are leaving behind dependants with special needs may also find that whole life insurance is a better life insurance policy option for them, as it never expires and will always cost the same price for premiums.

Policygenius’ editorial content is not written by an insurance agent. It’s intended for informational purposes and should not be considered legal or financial advice. Consult a professional to learn what financial products are right for you.