Whole life insurance: What is it & how does it work?
Whole life insurance is a type of permanent life insurance that provides coverage for your entire life and has a cash value that earns interest. It's generally best for high earners and people with long-term financial obligations.
Rebecca Shoenthal is a licensed life, disability, and health insurance expert and a former editor at Policygenius. Her insights about life insurance and finance have appeared in The Wall Street Journal, Fox Business, The Balance, HerMoney, SBLI, and John Hancock.
Amanda Shih is a licensed life, disability, and health insurance expert and a former editor at Policygenius, where she covered life insurance and disability insurance. Her expertise has appeared in Slate, Lifehacker, Little Spoon, and J.D. Power.
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Expert reviewed
This article has been reviewed by a licensed Policygenius expert to ensure that sources, statistics, and claims meet our standard for accurate and unbiased advice.
Certified Financial Planner™ & Advanced Planning Team Lead
Patrick Hanzel, CFP®, is a Certified Financial Planner™ and Advanced Planning Team Lead at Policygenius. His expertise has been featured at Lifehacker, Consumer Affairs, Authority Magazine, Thrive Global, and Fatherly.
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.
What does whole life insurance offer?
Buying a whole life insurance policy is an easy way to financially protect your family without worrying about policy expiration dates. Like all life insurance products, whole life pays a tax-free death benefit to your beneficiaries upon your death. The biggest difference from term life insurance is that it lasts your entire life.
Who can benefit from whole life insurance?
While most people find term life insurance more affordable, the permanence of whole life coverage and its special features — including a tax-deferred cash value — make it a good choice for people with a high net worth or lifelong financial responsibilities.
Whether you’re ready to buy whole life insurance or just want to learn more, we’re here for you every step of the way. Our agents can walk you through the process, answer questions, and help you compare quotes so you can find the most affordable option for your needs.
Unlike term life insurance, whole life insurance is a form of permanent life insurance. A whole life insurance policy lasts as long as the premiums are paid and has a cash value component that grows at a low interest rate set by your insurer.
Whole life policies are five to 15 times more expensive than term life insurance, but you may find whole life useful if you can afford the premiums.
Top benefits of whole life insurance
Most people find that the high cost of coverage and low returns that whole life insurance provides are not a good fit for their finances. For some, however, it makes sense to choose a whole policy over a term one. Benefits of whole life insurance include:
Coverage lasts your entire life
Policy earns interest through the cash value
Guaranteed rate of return on cash value
Tax-deferred investment option, ideal if you max out your other retirement accounts
Whole life insurance quick facts
Features
Policy overview
Average duration
Life
Average cost
$481 to $571/month
Guaranteed death benefit
Yes
Guaranteed cash value
Yes
How cash value grows
Earns interest at a rate set by your insurer
Premiums
Level
Methodology: Rates are calculated for male and female non-smokers in a Preferred health classification, obtaining a $500,000 whole life insurance policy payable until age 99. Individual rates will vary as specific circumstances will affect each customer's rate. Rate illustration valid as of April 2022.
How much does whole life insurance cost?
Whole life policies are pricey compared to term life insurance. “The range varies based on the length of the term you are comparing and the type of permanent product and features within that product,” says Patrick Hanzel, certified financial planner and advanced planning team manager 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.”
Sample whole life insurance rates
Age
Sex
$250,000
$500,000
$1,000,000
25
Female
$175.00
$346.00
$660.00
Male
$199.00
$393.00
$765.00
35
Female
$243.00
$481.00
$947.00
Male
$288.00
$571.00
$1,121.00
45
Female
$360.00
$716.00
$1,417.00
Male
$435.00
$866.00
$1,690.00
55
Female
$589.00
$1,173.00
$2,332.00
Male
$692.00
$1,380.00
$2,173.00
Methodology: Monthly rates are calculated for non-smokers in a Preferred health classification, obtaining a whole life insurance policy payable within 99 years from MassMutual. Individual rates will vary as specific circumstances will affect each customer's rate. Rate illustration valid as of 9/08/2022.
Whole life insurance premiums are calculated based on:
Age: The older you are, the riskier you are to insure. Life insurance rates increase by 4.5% to 9% every year, which is why it's a good idea to buy coverage when you're younger.
Coverage amount: The more coverage you get, the higher your premiums will be.
Payment schedule: You can pay your policy premiums over a set period — 99 years is most common — but if you pay faster (e.g., over 65 years) you’ll pay higher rates over less time.
Riders: Adding coverage can increase the cost of your policy, though some riders are free, like an accelerated death benefit rider or chronic illness rider, which both allow you to put the death benefit toward qualifying medical expenses.
Many people overestimate their ability to pay whole life premiums year after year. Approximately 30% of whole policies are surrendered within the first three years and 45% are surrendered within the first 10 years, according to a study by LIMRA and the Society of Actuaries. [1]
There are some variations on standard whole life coverage that differ in the policy terms, or how long you pay premiums. Some whole life policies are tailored to specific needs, such as:
Guaranteed issue: Offers no-medical-exam coverage up to $25,000 for people over age 45 with near-certain approval.
Simplified issue whole life: Offers no-medical-exam coverage up to $40,000 for people over age 45, but requires a medical questionnaire.
Joint whole life insurance: Covers two people under one policy and pays out either after one dies (first-to-die) or after both die (second-to-die or survivorship).
Other whole life policies offer flexible payment options or features that grow the cash value in ways tailored for different investment strategies. Common types include:
Indexed whole life insurance: The cash value earns interest based on an investment index chosen by your provider.
Variable whole life insurance: The cash value is invested in various funds offered by the insurance company, including mutual funds and annuities. Investment performance depends on market trends, so the policyholder bears all investment risk.
An insurance agent can work with you to get the best policy for your needs.
A whole life policy has two separate parts: the death benefit and the cash value.
The death benefit: The death benefit amount goes to your beneficiaries in a tax-free lump sum when you die, as long as you keep up with your policy premiums.
The cash value: The cash value portion of your policy builds interest over time. Unlike the death benefit, you can access this portion of your policy when you are alive. How the cash value grows, and what you can do with it, depends on the type of whole life insurance policy you have.
Does whole life insurance have cash value?
Most types of whole life insurance policies come with a cash value account that accumulates value over time. The type of whole life insurance policy you choose determines how the cash value component grows (or shrinks) overtime.
A cash value account is a benefit of whole life insurance you can access while you’re alive. It’s separate from the death benefit and can grow, similar to other savings accounts. In some accounts, it can also shrink, similar to other investment accounts. The cash value can be accessed in the form of policy loans (borrowing money from the policy) or by surrendering the policy to receive the existing cash value, though each whole life policy while have its own terms.
Not all cash value policies are the same, so it’s important to know the difference when shopping for whole life insurance.
How does whole life insurance build cash value?
How your whole life insurance policy builds cash value depends on which type of whole life insurance you have. Different types of whole life insurance policies such as indexed whole life, single premium whole life, and variable whole life build cash value in slightly different ways, as mentioned above. The cash value will either earn interest based on an investment index, a set rate by the insurance company, or a set of funds chosen by the insurance company.
Unlike other kinds of permanent life insurance, whole life insurance has a guaranteed cash value that grows at a fixed rate. The whole life insurance accumulated cash value is based on this fixed rate.
Where to buy whole life insurance
Every insurance company has its own rules for whole life policies and how it weighs different health risks, so one company may be a better fit for you than another. An independent broker like Policygenius can compare rates and policy features to help you find the right whole life insurance company for your needs, then guide you through the application process.
The insurer will review your application materials and medical records and determine how much you pay for coverage. Once you sign the policy paperwork and pay your first premium, you’re covered for life.
Whole life coverage is best for people in specific circumstances, like high earners who need an additional investment vehicle, or people with lifelong dependents.
For everyone else, it’s better to pursue a term life policy, which costs less for the same amount of coverage and provides the same protection to your family. And as an investment vehicle, whole life doesn't yield as high of a return as traditional investment accounts, like a 401(k) or IRA. If you’re still unsure which type of insurance is best for you, an insurance agent can help you weigh the pros and cons.
Frequently asked questions
Is whole life insurance a good investment?
A whole life policy has high premiums and low interest on the cash value. For a standalone investment account, there are better options available with higher interest.
How much is whole life insurance?
There is no one price point for coverage. The premiums for a whole life policy are based on your life insurance needs, but they are costly.
What are the benefits of whole life insurance?
It offers lifetime coverage and the cash value feature allows you to grow tax-deferred savings while taking on relatively low investment risk.
What is the catch with whole life insurance?
The high rates, low return on cash value, and additional features and restrictions of whole life can make it harder to understand and maintain.
References
Policygenius uses external sources, including government data, industry studies, and reputable news organizations to supplement proprietary marketplace data and internal expertise. Learn more about how we use and vet external sources as part of our
Rebecca Shoenthal is a licensed life, disability, and health insurance expert and a former editor at Policygenius. Her insights about life insurance and finance have appeared in The Wall Street Journal, Fox Business, The Balance, HerMoney, SBLI, and John Hancock.
Amanda Shih is a licensed life, disability, and health insurance expert and a former editor at Policygenius, where she covered life insurance and disability insurance. Her expertise has appeared in Slate, Lifehacker, Little Spoon, and J.D. Power.
Certified Financial Planner™ & Advanced Planning Team Lead
Patrick Hanzel, CFP®, is a Certified Financial Planner™ and Advanced Planning Team Lead at Policygenius. His expertise has been featured at Lifehacker, Consumer Affairs, Authority Magazine, Thrive Global, and Fatherly.
