How does whole life insurance work?

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

Whole life insurance cash value

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 Though, if you surrender your policy or it becomes void, the money you have withdrawn will be considered taxable income.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.

Whole life insurance rates

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 insurance 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.

Whole life insurance 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.

Whole life insurance 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.

High whole life insurance rates explained

Whole life insurance’s high premiums come with the territory; permanent life insurance policies tend to be costlier than term life insurance policies. 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.

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:

10 Pay and 20 Pay whole life insurance rates

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.

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.

Whole life insurance rates vs. term life insurance rates

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 term life insurance rates are generally a lot cheaper than whole life insurance.

The permanent nature of a whole life insurance 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 insurance policy across age and gender.

Whole life insurance vs. other types of permanent life insurance

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.

Universal life insurance rates

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.

Guaranteed universal life insurance rates

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.

Is 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.