Q

What is whole life insurance and how does it work?

A

Whole life insurance is a permanent policy that lasts your whole life. It includes a cash value savings component, which makes it more expensive than other types.

Purchasing whole life insurance is an easy way to protect your loved ones financially without worrying about policy expiration dates. Like all life insurance products, whole life pays a tax-free death benefit to your beneficiaries if you die while your policy is active.

While most people will find term life insurance more affordable, the permanence of whole life coverage and the tax-deferred cash value make it a good choice for high-earners or people with lifelong financial obligations.

KEY TAKEAWAYS

  • Premiums fund your policy and an additional cash value feature

  • The cash value works like a guaranteed investment and grows at a low rate

  • Policies are five to 15 times more expensive than term life insurance; 45% of policyholders abandon their policy within the first 10 years

  • A whole life policy is best if you need coverage for your entire life or need another investment account

What is whole life insurance?

Whole life insurance is a type of permanent life insurance (also called cash value life insurance). The policy lasts as long as the premiums are paid and has a savings feature called the cash value that grows at an interest rate set by your insurer.

Life insurance providers usually guarantee a minimum interest rate for the cash value. However, returns on your investment may be small. That’s because insurance companies charge administrative fees to manage your policy that a typical investment company doesn't.

Whole life insurance quick facts

FEATURESPOLICY OVERVIEW
Average DurationLife
Average Cost$55-136/month
Guaranteed Death BenefitYes
Guaranteed Cash ValueYes
How Cash Value GrowsEarns interest at a rate set by your insurer
PremiumsLevel
NotesLow-risk investment compared to other permanent insurance, but you’ll find a better rate of return elsewhere

Methodology: Average cost calculated for male and female non-smokers between 20 and 40 years old in New Jersey in a Preferred health classification, obtaining a $100,000 whole life insurance policy paid until age 99. Life insurance quotes based on policies offered by Policygenius from our partner whole life insurance companies: AIG, Guardian Insurance, MassMutual, and Mutual of Omaha. Individual rates will vary as specific circumstances will affect each customer’s rate. Rate illustration valid as of 5/17/2021.

→ Learn more about the different types of whole life insurance

Do you need whole life insurance?

Most people are better off with term life insurance, which is much cheaper for the same amount of coverage and still provides plenty of protection to your loved ones.

Using life insurance to invest isn’t a great idea if you have other options, like a 401(k) or IRA. Traditional investment accounts usually grow at a faster rate than cash value accounts.

But if you have a high income and regularly max out your other retirement accounts, the new tax-deferred investment option might be worth the high whole life premiums. If a loved one will need care after you are gone, whole life guarantees continued financial support for them. 

Ready to shop for life insurance?

Start calculator

How much does whole life insurance cost?

"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 Team Lead 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."

Sample whole life insurance premiums

COVERAGE AMOUNTMONTHLY PAYMENTANNUAL PAYMENT
$100,000$89/ mo$1,023/ year
$250,000$213/ mo$2,448/ year
$500,000$421/ mo$4,839/ year
$1,000,000$827/ mo$9,506/ year

Methodology: Sample rates are for a 30-year-old male non-smoker in a Preferred health classification in New Jersey buying a whole life policy paid until age 99. Life insurance quotes based on policies offered by Policygenius from our partner whole life insurance companies: AIG, Guardian Insurance, MassMutual, and Mutual of Omaha. Individual rates will vary as specific circumstances will affect each customer’s rate. Rate illustration valid as of 5/17/2021.

No matter what type of life insurance you buy, your premiums will vary, as they are set based on your:

  • Health: Medical concerns increase the cost of your premiums. 

  • Age: The older you are, the riskier you are to insure. Life insurance rates increase by 4.5-9% every year.

  • Coverage amount: The more life insurance coverage you get, the higher your premiums will be.

  • Term length: Life insurance policies that last longer cost more, which is one reason why whole life costs more than term life insurance.

  • Riders: Adding coverage can increase the cost of your policy, though some riders are free.

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.

→ Learn more about whole life insurance rates

quote

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.

- Patrick Hanzel

How to buy a whole life insurance policy

No insurance policy is the best for everyone. You should compare quotes to find the best policy for your family’s needs, but also consider buying life insurance from a provider that:

  • Is favorable toward applicants with any health conditions you may have

  • Guarantees a good rate of return on the accumulated cash value

  • Offers the policy options and riders that you want

  • Has good customer service and online policy management options

  • Is well-rated by trusted third-party agencies

→ Learn more about the best whole life insurance companies

Whole life vs. term life insurance

The biggest difference between whole and term life insurance is that term life insurance ends after a set number of years. Term life pays out if you die within that time and nothing more. 

Whole life, on the other hand, costs more than you would pay for an equal coverage amount of term life because it lasts longer and builds cash value.

→ Check out our full guide on term vs. whole life insurance

Pros and cons of whole life insurance

Like all life insurance policies, whole life coverage comes with its own set of benefits and drawbacks.

PROSCONS
Coverage lasts your entire lifeCoverage is expensive compared to term life
Policy earns interest through the cash valueCash value comes with high administrative fees
Guaranteed rate of return on cash valueTraditional investing has better returns

Alternatives to whole life insurance

  • Term life insurance : Because term life is so much cheaper than whole life, you can buy a lot more coverage for the same amount of money.

  • Other types of permanent life insurance : Other permanent policies earn interest differently, which may better suit your needs.

  • Single premium life insurance : Single premium is a type of whole life policy that only requires one premium payment. Instead of paying 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

Compare the market, right here.

Policygenius saves you up to 40% by comparing the top-rated insurers in one place.

Is whole life insurance worth it?

Whole life coverage is best for people in specific circumstances, like high earners who need a new way to invest or people who care for someone who needs lifelong financial support. For everyone else, it’s better to pursue a term life policy.

Whole life insurance FAQ

How does whole life insurance work?

Whole life coverage lasts for your entire life and can earn interest over time with its cash value. The cash value can be used as an additional investment account and can be accessed while you’re alive.

Is whole life insurance a good investment?

Most of the time, a whole life policy shouldn’t be a part of your savings strategy because of the high premiums and low 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.