Looking to build a tax-free inheritence and protect your family? Find out if whole life insurance is right for you.
Whole life insurance is a kind of permanent life insurance policy—meaning it lasts your whole life—that eventually pays out a tax-free sum of cash to your beneficiaries when you die. This differs from term life insurance, the other main kind of life insurance, which covers you for a set period of time and then expires.
Aside from the length of coverage, the main difference that defines whole life insurance is that it contains a savings component that builds cash over your life out of the monthly premiums you pay. Whole life insurance therefore doubles as a kind of savings account, but one that pays a lump sum to your family if you should die prematurely.
The cash value aspect of whole life insurance is similar to other types of permanent life insurance like universal life insurance and variable life insurance, which all feature cash savings.
Whole life insurance is more complicated and expensive than term life insurance, and Policygenius recommends against it for most shoppers. Here’s why: If you live to old age, your beneficiaries will eventually get back only what you contributed to the policy, plus a small amount of interest—likely much smaller than that same amount would have generated if it were invested in an IRA or other account. And if you should die prematurely, the payment amount your beneficiaries will receive could have been purchased with a term policy that would cost you much less during your lifetime. Here’s an overview on whole life insurance:
|Whole Life Insurance Overview|
|Guaranteed Death Benefit||Yes|
|Guaranteed Cash Value||Yes|
|How Cash Grows (or Shrinks)||Earns interest at pre-determined rate|
|Notes||No risk compared to other permanent types such as Variable Life Insurance, but there are probably better investment options for the cash you’ll contribute|
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 three to four times more expensive than term life.
|Annual payment||Monthly payment|
|$100,000||$1,030/ year||$89/ mo|
|$250,000||$2,440/ year||$212/ mo|
|$500,000||$4,800/ year||$420/ mo|
|$1,000,000||$9,510/ year||$827/ mo|
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.
Whole life insurance can be customized with additional features or add-ons to provide different types of optional coverage. These features—called riders—will increase the cost of the premiums. Each company offers different riders at different prices, so be sure to ask the insurer for details and read the policy’s fine print. Not all companies define life events such as critical illness or disability the same way, so terms may vary by state. Here are some of the most common riders:
In the event that you require long-term medical care in old age that your health insurance policy won’t pay for, such as nursing home costs or at-home care, a long term care rider on your whole life insurance policy will cover the costs. Payments for long-term care will be made monthly.
In the event the insured dies prematurely, a family income benefit rider provides steady income to the family beneficiaries to cover monthly costs beyond the lump-sum death benefit payment. The amount and duration of these monthly payments are determined when purchasing the rider.
A disability waiver allows the insured to skip paying monthly premiums in the event that he or she suffers a loss of income due to disability. Premium payments can be skipped without the policy being cancelled until the insured recovers and regains the ability to generate an income. Whole life insurance can be very expensive, and without this rider the insured runs the risk of being unable to make monthly payments and losing coverage.
Allows the insured to access the death benefit payout while still living if he/she is diagnosed with terminal illness and needs to use the cash to cover the costs of care. This is similar to the long term care rider mentioned above, but in this case the payment received comes out of the death benefit instead of being provided in addition.
Want to keep learning? Read our full analysis on the pros and cons of term life vs whole life policies.
Similar to whole life insurance except it allows more investment options for the cash value component. Investment funds with variable rates of return will reflect broader market trends and potentially give you a better return on investment than whole life—but with more risk.
Similar to whole life insurance except 1) premium costs are subject to change—the rate is set by the insurer and can increase over time, 2) the cash value can be used to pay the premiums, and 3) the cash value grows at a variable interest rate set by the insurer.
A form of life insurance for seniors, final expense insurance is meant to cover any outstanding debts at the end of life. Policies are typically sold for smaller coverage amounts—$10,000 or $25,000 for example.
Aside from permanent life insurance policies such as whole life, the other main category of life insurance is called term life insurance. Term life, unlike permanent life insurance, doesn’t last your whole life—rather, it covers you for a set period of time and then expires. Term life policies last between 10 and 30 years—usually as long as the policyholder has dependents relying on his or her income. Term life insurance is many times cheaper than whole life insurance. Curious to learn more?