Whole life insurance

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What is whole life insurance?

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.

How it works

1. Whole life insurance will pay out a set amount of money to your beneficiaries when you die, called a “death benefit.” The bigger the sum, the more expensive the policy will be.
2. You’ll pay monthly or annual premiums to keep the policy in force and it will remain active your whole life, as long as you keep paying the premiums.
3. Each month, a certain amount of your premium will go toward the policy’s savings component, called the “cash value.” The insurance portion of the death benefit gradually shrinks as the cash value grows, until eventually the cash value makes up 100% of the money the insurance policy will pay out.
4. You’ll earn a small amount of interest on the cash value, predetermined by the insurer.

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:

Cost of whole life insurance

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.

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.

Riders

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:

Long term care rider

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.

Family income benefit rider

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.

Disability waiver of premium

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.

Accelerated death benefit rider

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.

Pros and cons of whole life insurance

Reasons to buy whole life insurance

• Provide your family the ability to cover debts such as mortgage, student loans, etc in the event that you die prematurely
• Build savings that will grow and earn some interest as you pay premiums over the your lifetime
• Create tax-free inheritance for beneficiaries (applicable to high net-worth individuals whose inheritance will be subject to estate tax)
• Cover final expenses like funeral and other end-of-life costs

Drawbacks of whole life insurance

• Few, if any, investment options for the cash value that will eventually comprise all of the death benefit. Probably a much lower rate of return than investing this money in other ways over the course of your life
• Much more expensive than term life insurance for the same death benefit coverage

Want to keep learning? Read our full analysis on the pros and cons of term life vs whole life policies.

Other types of permanent life insurance

Variable life insurance

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.

Universal life insurance

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.

Final expense insurance

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.

Other types of life insurance

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?

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Learn more about whole life insurance

• How much life insurance do I need?
• Is whole life insurance worth it?
• What does Suze Orman think about whole life insurance?
• Variable life insurance vs universal life insurance: What’s the difference?
• Life Insurance 101
• Is variable life insurance worth it?
• Term vs. Whole life insurance
• The truth about forced savings & whole life insurance