Whole life insurance lasts your whole life, and you only have to pay premiums until a certain age or for a certain number of years. If you live past that time frame, you’ll remain covered until you die.
Whole life insurance is the more complicated cousin of term life insurance that lasts your whole life. Like term life insurance, whole life insurance protects your family from financial burden when you die, as long as you kept paying your premiums, by paying out a death benefit, usually between $100,000 and $5 million.
Whole life insurance also has a cash-value component that works sort of like an investment account. Gradually, the cash-value component replaces the death benefit until only the cash value remains. But if you redeem the cash while you’re still alive, then the death benefit will be diminished, often by a much larger amount than the cash you withdrew.
With these added features, whole life insurance is much more expensive than term life insurance. How much more? Over a comparable period of time, a healthy 30-year-old male would pay $564 per month for $500,000 of whole life coverage when he could be receiving $500,000 of coverage for $24 per month with a term life policy.
Why so high? Because while whole life insurance lasts your whole life, you only have to pay premiums until a certain age or for a certain number of years. If you live past that time frame, you’ll remain covered until you die but won’t have to pay anymore. Term insurance is like renting an apartment, but whole life insurance is like buying a house: you pay your mortgage each month until suddenly you own an asset, the house. The same is true for whole life insurance in that you pay premiums to support a death benefit until suddenly you have an asset, the cash value account.
The following rates represent the a sample of premiums paid by a 30-year-old male who earned a Preferred nonsmoker classification from the life insurance underwriter, indicating that he’s healthy and presents little risk of dying.
The main difference between each set of premiums is when the insured has to stop paying them. Each set is grouped by the type of whole life insurance. To figure out how much life insurance you need, add up your expenses, such as debt and loan payments, the cost of caring for your dependents, and how much of a financial cushion you want to leave your beneficiaries.
A whole life insurance policy provides a death benefit for the insured’s lifetime. Also called permanent life insurance, the policy has a cash value and could qualify for annual dividends that increase the cash value and death benefit. With whole life insurance, you pay level premiums until you turn a certain age, after which you don’t have to pay anymore: you’ll remain covered or you can withdraw the accumulated cash value without paying a surrender fee. (You may still have to pay taxes. Check with your financial planner or tax attorney.) You can choose the cut-off age when you sign up for the policy, and the longer you choose to pay premiums, the cheaper they’ll be.
As with premiums you pay for until a certain age, some whole life insurance policies let you pay for a period of years. All things equal, these policies are by far the most expensive because the period you have to pay is relatively short, and then you get coverage for the rest of your life. As with other types of guaranteed whole life insurance, you pay level premiums and receive a level death benefit.
Called “10 Pay” or “20 Pay” life insurance, meaning you pay for 10 years or 20 years, respectively, your premiums could be as high as $2,000 per year. These policies are mostly useful only to people who have a lot of disposable income over that period and need another tax-advantaged savings account because they maxed out all the others.
Universal life insurance is the least expensive type of whole life insurance. With UL, your premiums support the death benefit, and the excess goes toward the cash value. The cash-value amount accrues interest, and your premiums make up the rest.
But with UL, as opposed to guaranteed universal life insurance (see below), the interest rate fluctuates along 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.
For that reason, 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%.) When the 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 for decades.
Guaranteed universal life insurance is generally similar to universal life insurance, except your premiums stay the same regardless of broader market trends. That’s because you agree to an interest rate when you sign for the policy, which is baked into your premiums from the start. Guaranteed universal life insurance is so called due its “no-lapse” guarantee. As long as you keep paying your premiums, the policy will never lapse, regardless of what happens to interest rates. In that respect, GUL is like a term policy but with a term that only ends when you die.
Disclaimer: 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.