Whole life insurance: What it is & how it works

What is whole life insurance?

Whole life insurance is a type of permanent life insurance that provides coverage for your entire life and includes a cash value component that you can access while you’re alive

How does whole life insurance work?

Like all life insurance products, whole life insurance pays a death benefit to your beneficiaries upon your death in exchange for the premiums you pay to keep your policy active. Other distinctive features of a whole life insurance policy include:

It doesn’t expire: Because it’s a type of permanent life insurance, whole life insurance lasts your entire life.
It builds long-term cash value: Whole life also has a cash value component that accumulates value over time based on a guaranteed minimum interest rate set by your insurance company. The cash value can be accessed while you’re still alive.
It may pay dividends: Some traditional whole life policies are dividend-paying, meaning they pay an annual bonus to policyholders if the insurance company over-performs financially.

Who can benefit from whole life insurance?

A traditional whole life policy can benefit people who have long-term financial obligations or high-net-worth individuals.

High-net-worth individuals

People who are seeking an additional investment vehicle can benefit from whole life insurance, especially if they’re already maximizing contributions to traditional investment accounts like a 401(k) or IRA. Whole life insurance can also be used as a buffer against estate tax, if your estate falls in the qualifying bracket.

People with long-term financial obligations

If you have financial obligations that will last longer than 20 to 30 years — for example, lifelong dependent children, or if you expect to care for aging parents — having a permanent death benefit can ensure they'll be cared for whether you're alive or not.

Is whole life insurance worth it?

Whole life insurance is best for people in specific circumstances, like those who have the budget for an additional investment vehicle, people with lifelong dependents, or those with significant estates looking to offset estate tax.

If you know you need life insurance primarily to provide income replacement for your family if you were to die, term life insurance is likely a better bet, coupled with traditional investment vehicles which are less risky and yield higher returns than many whole life cash value accounts.

If you’re not sure if whole life insurance is worth it for you, working with a financial planner or insurance professional can help.

Benefits of whole life insurance

Whole life insurance, by definition, lasts your whole life so you don't have to worry about your coverage expiring. This can be especially helpful if you have a need for coverage that will last longer than 30 years, the maximum length of many term policies.
Your policy also earns interest through the cash value which can make it another tax-deferred investment option if you already maximize contributions to your other retirement accounts.

Disadvantages of whole life insurance

Whole life is five to 15 times more expensive than term life insurance. If you take out a whole life policy and then find you can’t afford to keep it, you risk leaving your family without protection. With whole life, penalties can apply if you cancel coverage (there's not a penalty to cancel term life insurance).

As an investment vehicle, one disadvantage of whole life is that other investment options offer higher rates of return.

There’s also a higher degree of risk involved — tax-advantaged accounts like Roth IRAs, for example, don’t require that you fund them every year, so you have more flexibility with how much you’re looking to invest. With whole life policies, on the other hand, you have to continue paying your premiums for your policy to remain active and for your cash value to accumulate.

How long does whole life insurance last?

Whole life insurance coverage lasts your entire life, unless you choose to cancel your policy or stop paying premiums.

For most whole life insurance policies, you'll pay premiums for the rest of your life. There are some policies — called 10 Pay or 20 Pay — that have a payment plan that’s structured so that you’ll pay the entire cost of the policy over 10 or 20 years, but those premiums will be much higher. Other policies can be structured so they’re fully paid up at a specific age, like 65.

How much does whole life insurance cost?

Rates for a whole life policy with a $500,000 coverage amount could range from $350 to $1,500 per month or more based on your age, gender, health, and policy choices. A Policygenius agent can help you tailor a whole life policy to your budget.

Average monthly whole life insurance rates by age and gender

Age	Gender	$250,000 coverage amount	$500,000 coverage amount	$1 million coverage amount
25	Female	$180	$356	$697
	Male	$209	$413	$810
35	Female	$251	$498	$981
	Male	$309	$612	$1,210
45	Female	$389	$773	$1,532
	Male	$478	$952	$1,858
55	Female	$635	$1,266	$2,517
	Male	$775	$1,545	$3,038

Collapse table

Methodology: Rates are calculated for male and female non-smokers in a Standard health classification, obtaining a $250,000, $500,000, and $1,000,000 whole life insurance policy fully paid up at age 100 from MassMutual. Individual rates will vary as specific circumstances will affect each customer's rate. Rate illustration valid as of 06/01/2023.

What factors affect whole life insurance rates?

Like other types of life insurance, whole life rates are affected by your age, gender, health, and coverage amount. Each insurance company has their own guidelines to assess risk and assign your rates.

Generally speaking, the younger you are and fewer health conditions you have, the cheaper your rates will be. And, as pictured above, the higher your coverage amount, the more expensive your rates will be.

How long does it take for whole life insurance to build cash value?

It typically takes at least five to 10 years for whole life policies to build significant cash value. However, different types of whole life policies can vary by how they accumulate cash value, so be sure to speak with your agent and financial advisor on a more tangible timeline for your specific policy when purchasing.

Whole life insurance and taxes

One of the main tax advantages of whole life insurance is that the cash value provides a tax-deferred investment vehicle.

There are a few situations in which the policyholder would need to pay taxes, though. If you withdraw from your policy’s cash value, you’ll have to pay taxes on any amount that’s above the cost basis, which is the total amount you’ve paid in premiums. Otherwise, you don’t have to pay taxes on your withdrawal.

As with other kinds of life insurance policies, your beneficiary will also receive the death benefit tax-free when you die. If they choose to receive the death benefit as an annuity, they’d pay taxes on any interest earned. If your estate is valued over $12.9 million, your beneficiary may have to pay taxes upon receiving the money, too. [1]

Is whole life insurance tax deductible?

Your premiums themselves aren’t tax deductible, unless you’re in a few specific situations — like if you’re an employer offering an employee benefit, or if you donate your policy to charity.

If you have questions about the tax implications of your permanent life insurance policy, it’s best to consult with a tax professional.

Common types of whole life insurance

Indexed whole life insurance

Indexed whole life insurance is a permanent life insurance option with a cash value account that earns interest based on an investment index chosen by the insurance company — for example, the S&P 500.

Modified whole life insurance

Modified whole life insurance is a type of whole life policy that offers lower premiums for a short time — typically the first two to five years — followed by much higher premiums for the remainder of the policy.

Simplified issue whole life

Simplified issue whole life insurance offers a small amount of permanent coverage and doesn’t require a medical exam — it’s called simplified issue because the underwriting process is not as extensive. Typically, you can get coverage up to around $50,000, but it depends on the insurer.

Guaranteed issue whole life

Guaranteed issue life insurance is a type of whole life insurance that offers near-certain approval and doesn’t require a medical exam to apply. The maximum coverage amount is typically $25,000.

Variable whole life insurance

In variable whole life insurance policies, the cash value is invested in various funds offered by your insurer. You may earn more interest this way than you would with a traditional whole life policy, but you take on more investment risk if your selected funds underperform.

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Whole life insurance vs. term life insurance

The main differences between whole life and term life are:

The length of your coverage: Whole life is permanent coverage, while term life lasts for a set number of years and then expires.
The premium costs: Whole life is five to 15 times more expensive than term life.
The cash value: Whole life has a separate cash value account, while term life does not.

Whole life insurance vs. universal life insurance

Whole life and universal life are both types of permanent coverage, but there’s one substantive difference between them.

The premiums: Whole life has fixed premiums, while universal life insurance allows you to increase or decrease how much you pay toward premiums. Another difference is that the cash value of your universal life insurance policy can be used to pay your premiums.

Other types of life insurance

AD&D: AD&D insurance stands for accidental death and dismemberment. These policies are a type of life insurance that only pays out if the cause of death was an accident, or if the insured experienced a significant injury.
Corporate-owned life insurance: Corporate-owned life insurance is owned by a company on an employee who is critical to business function, like an executive. If the employee dies, the company claims the death benefit.
Group life insurance: Group life insurance is commonly offered through employers. It’s technically one contract that covers many people, so it can be cost effective, although the coverage amount is typically not enough to cover most people's financial obligations — only one to two times your annual salary.
Credit life insurance: This kind of policy is tied to a specific debt, and the creditors receive the beneficiary directly if the insured dies.
No medical exam life insurance: This refers to life insurance that doesn’t require a medical exam for approval.

How and where to buy whole life insurance

Buying life insurance doesn’t have to be complicated.

First, you fill out an application, have a phone call with an agent, and then, in most cases, take a medical exam.
After that, you’ll wait for the insurance company to review your application and give you your final rate
Once you sign the policy paperwork and pay your first premium, you’re covered.

Two common ways to buy life insurance are from an independent broker that works with multiple companies, or directly from the insurance company. At Policygenius, you can compare top-rated life insurers in one spot. Our experts are licensed in 50 states and can provide you unbiased advice on where to start.

Why shop with us for whole life insurance

We do more than just sell insurance. Whether you're just getting started shopping or are ready to buy, our licensed experts are here at every step to answer your questions, handle paperwork, and help you secure the whole life policy that's right for your family.

How much whole life insurance do I need?

How much life insurance you need in general will come down to your financial needs and goals. Your ideal coverage amount should be enough to pay for your dependents' expenses for a meaningful length of time — a common rule of thumb is to multiply your income by 10, and factor in any additional expenses like a mortgage or the cost of a child's education.

It can be helpful to discuss with a financial advisor and licensed agent when it comes to whole life in particular, since these are nuanced products.

Frequently asked questions

Is whole life insurance a good investment?

Traditional investment accounts typically offer higher returns and more flexibility than whole life insurance policies. If you’re already maximizing contributions to a 401(k) or IRA and have income to spare, whole life can serve as an additional investment vehicle.

What age is best to buy whole life insurance?

Many adults don’t need whole life insurance at all. However, the younger you are when you purchase a policy, the cheaper your premiums will be, since we all become riskier to insure as we age.

Does whole life insurance always pay out?

Whole life insurance policies will pay out a death benefit to your beneficiary if you die while the policy is active. This is true except for a few exclusions, such as instances of insurance fraud or suicide during the first two years a policy is active.

Can you cash out a whole life insurance policy?

You can withdraw from the cash value of your whole life insurance policy. You can also take the cash surrender value — which is your cash value minus any surrender fees. Usually, fees are steep if you cash out a whole life policy in the first 10 or so years, so it’s best to consult a licensed agent or speak with your insurer before doing so.

What is the minimum amount of whole life insurance I should buy?

The minimum amount of life insurance coverage you should buy will depend on your financial protection needs. Typically, $50,000 is the minimum available for traditional whole life policies, while other types of whole life, like guaranteed issue, can provide as little as $2,000 in coverage.