Whole life insurance

You probably already know you may need some form of life insurance to protect your loved ones financially. What you may not know is how all of these different life insurance policies compare. A lot of terms get thrown around and it’s hard to keep up.

Like all life insurance products, whole life is designed to provide financial protection for people or organizations you care about in the event of your death.

What is whole life insurance?

Whole life insurance is a type of permanent life insurance (also called cash value life insurance), which is one of the two major categories of life insurance. (The second major category is term life insurance).

There are four major parts of a whole life policy:

1. The death benefit is a tax-free chunk of cash paid out by the life insurance company if you die. For example, let’s say you buy a whole life insurance policy with $500,000 in coverage. That $500,000 is the death benefit.

2. A beneficiary is the person or people that receive the death benefit. Beneficiaries can be your spouse, your kids, a trust, a business partner, a friend, a non-profit organization and other legal relationships and organizations.

3. Your premiums are how you pay for your life insurance policy. You usually pay monthly or annually.

4. The cash value is one of the main reasons to get a whole life insurance policy and functions as an investment vehicle. It accrues interest over time and can be accessed while you’re alive.

Whole life insurance lasts for your whole life — as long as you keep paying the insurance premiums. That means if you buy it when you’re 30 and keep paying your premiums until you die at 85, your family will receive the death benefit.

Whole life insurance quick facts

How does the cash value part of whole life insurance work?

When you pay your life insurance premium, a certain percentage goes into a tax-deferred savings component, known as the cash value of the policy.

The cash value of your policy earns interest and grows tax-deferred over time, at a rate determined by your individual policy. The growth rate is generally on the low end compared to other investments because life insurance companies have additional expenses (like policy administration expenses, underwriting costs, and death benefit payouts) that a pure asset manager does not.

→ Read our full explanation of cash value life insurance here

Types of whole life insurance

Whole life insurance is a traditional type of permanent life insurance that pays out guaranteed dividends. Permanent life insurance has multiple iterations that allow for the policy to cater to your specific insurance and investment needs.

• Universal life insurance has a cash value with a variable interest rate. After your cash value builds up over time, you can use it to pay for your policy’s premiums.
• Variable life insurance has a cash value with an interest rate that can grow or shrink depending on market trends.
• Variable universal life insurance allows you to determine what assets your premiums invest in to. The cost of your premiums fluctuates depending on market rates.

Whole life vs. term life

The biggest difference between term life insurance and whole life insurance is that term life insurance ends after a set number of years; it offers a death benefit and nothing more. Permanent policies like whole life insurance, on the other hand, cost more because they build cash value.

Since whole life insurance is guaranteed to pay out eventually, it is much more expensive and more complicated than term life insurance. Most permanent life insurance policies, like whole life, are at least five to 15 times more expensive than term life.

→ For more information, check out our full guide on term vs. whole life insurance

Who needs whole life insurance?

Most people don’t need a whole life insurance policy. Term life insurance generally offers the same amount of life insurance coverage at a more affordable price, while traditional investment vehicles usually yield higher returns than a whole life insurance policy. But if you have lifelong dependents or you’ve maxed out other investment accounts, then you might need a whole life insurance policy. Because whole life insurance coverage lasts your entire life, it’s the right policy type for anyone who can’t run the risk of their policy expiring. And if you’re a high-income earner, whole life insurance can be incorporated into your financial strategy as a supplement to other investments.

How much does a whole life insurance policy cost?

Overall, life insurance costs are determined by:

• Health: An adverse medical history makes you a risky candidate to insurers and increases the cost of your premiums. Your weight, any diagnoses, and prescription history all have an impact on your overall health profile.
• Age: The older you are, the higher the risk you pose to a life insurance company. Life insurance rates increase by 8-10% every year that you age.
• Coverage amount: The more life insurance coverage you get, the higher your premiums will be.
• Term length: Life insurance policies with longer term lengths cost more, which is why whole life insurance is more expensive than term life insurance.
• Riders: Adding on supplemental coverage to your life insurance policy can increase the cost of your premiums, though some riders are included in your policy for free.

"On average, permanent coverage can be five to 15 times more expensive than a term policy with the same benefit amount. This range can vary based on the length of the term you are comparing and the type of permanent product and features within that product,” says Patrick Hanzel, Advanced Planning Specialist and Certified Financial Planner at Policygenius. "For example, some permanent products can have additional benefits like cash value accumulation and a growing death benefit. Others can be lower in cost but not include similar benefits."

Whole life insurance policy sample rates

Methodology: Sample based on lowest cost average from top carriers for a 30-year-old male in highest health classification in the New Jersey area. Life insurance quotes based on policies offered by Policygenius in September 2020 from our partner whole life insurance companies: AIG, Guardian Insurance, MassMutual, and Mutual of Omaha.

Many people overestimate their ability to pay the large premiums year after year. Approximately 30% of whole life insurance policies are surrendered within the first three years and 45% are surrendered within the first ten years, according to a study by LIMRA and the Society of Actuaries (SOA).

Some permanent products can have additional benefits like cash value accumulation and a growing death benefit. Others can be lower in cost but not include similar benefits.

→ Learn more about the cost of whole life insurance

Pros and cons of whole life insurance

Like all life insurance policies, whole life insurance comes with its own set of benefits and drawbacks that are worth considering when you’re purchasing a life insurance policy.

Alternatives to regular whole life insurance

• Term life insurance: Because term is so much cheaper than whole life insurance, you can buy a lot more coverage (meaning a larger death benefit) for the same amount of money.
• Other permanent (cash value) life insurance: There are other types of permanent life insurance policies besides whole. These all differ in how the cash value portion of the policy works.
• Single premium life insurance: Single premium life insurance is a type of whole life insurance that only requires one premium payment. Similar to a traditional whole life insurance policy, single premium life insurance offers a cash value component that you can access while you’re still alive. But instead of paying your premiums monthly or annually, you make one upfront payment for a lifetime of coverage.

→ Learn more about the other types of life insurance and how they work

What's the best whole life insurance company?

There are multiple types of whole life insurance policies, and the one you want will depend on your individual needs. Most of the top life insurance companies offer some sort of whole life insurance, though the type of whole life insurance policy you can get varies for each insurer. You'll want to work with an agent to determine the right life insurance company for your individual needs.

Those looking for traditional whole life insurance policies will likely be able to find one through MassMutual and Guardian Insurance. But if you're just looking to cover end of life expenses, such as funeral costs, then you'll want to explore your options with AIG or Mutual of Omaha.

And if you're looking for universal life insurance, a type of whole life insurance, look no further than any insurer that partners with Policygenius.

→ Learn more about how the best life insurance companies rank

How to buy a whole life insurance policy

Before you get a whole life insurance policy, you should make sure permanent coverage is in line with your needs. Most people are better off with term life insurance — it's exponentially cheaper for the same amount of coverage. But if your circumstance warrants a whole life insurance policy (perhaps because you have a high-net-worth or permanent life insurance needs), then you'll undergo the typical underwriting process to get a traditional whole life insurance policy, which includes an initial phone interview with a Poligygenius and a medical exam conducted by the insurer.

If you're opting in for final expense insurance, which offers much less coverage, then the application process is a little more cut and dry: you'll talk through your needs with the life insurance agent and pay your first premium, putting your coverage in force.

Many major insurance companies, like AIG, Mutual of Omaha, and Transamerica offer types of whole life insurance. While insurance companies are the ones who offer whole life insurance policies, you shouldn’t try to buy them directly from the companies. Instead, you should go through an independent agent or broker like Policygenius, who can help you compare whole life insurance policies from a variety of companies. This advice is the same if you’re looking for term life insurance as well.

→ Find out more about buying life insurance

How Policygenius helps you get the right policy

Speaking to a Policygenius agent is the best way to determine if the high cost of whole life insurance is worthwhile depending on your individual needs. Policygenius agents make no commission and aren't incentivized to promote specific life insurance policies. Instead, they qualify your background to determine what type of policy and coverage best suits you — and where you can get it at the lowest price point.

Alongside that, they're with you every step of the way to ensure a seamless underwriting process and financial protection for the people you love.

→ Learn more about how Policygenius helps people like me

Is whole life insurance worth it?

Short answer: only if you have circumstances that would require it. While many agents, brokers, and insurers argue in favor of permanent life insurance policies like whole life insurance, these products do have their critics, including popular financial personalities like Dave Ramsey, Suze Orman, and Clark Howard.

Whole life insurance products and services, however, are useful for some people. For those with high incomes who have already maxed out their other tax-deferred accounts, whole life insurance can be a useful part of managing your estate. And if you have a special needs dependent who will need care after you are gone, whole life is a good option.

But for the vast majority of people — and especially the 45% who surrender whole life insurance policies within the first 10 years — a term life insurance policy is the better option. You’ll get more coverage at a cheaper rate than you would with whole life insurance, making it more affordable for the decades that you’ll be paying premiums.

It’s also a good idea to avoid combining insurance and investment or savings. Insurance is not an investment, and shouldn’t be treated as an investment vehicle. If you’re trying to put together a long-term financial strategy, get expert help from a financial adviser or tax expert. They can help you structure your finances in such a way that you pay the least amount of tax and have a high growth rate.