What is whole life insurance and how does it work?

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.

What is whole life insurance?

Whole life 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 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

How does whole life insurance work?

A whole life policy lasts your entire life and accrues interest over time with its cash value component. The cash value is an additional investment vehicle and can be accessed while you’re alive, though sometimes with a penalty.

→ 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 additional 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.

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

No matter what type of life insurance you buy, your premiums will vary, as they are 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. [40]

→ Learn more about whole life insurance rates

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 the best whole life insurance policy for you

No one type of coverage is best for every person. But, there are some simple ways to decide which whole life policy is best for your family’s needs:

1. Calculate how much coverage you need: The amount depends on your income—Policygenius experts recommend at least 10-15x your salary—any debts you have, and the financial needs of your family. 

2. Decide what type of whole life insurance to buy: A standard whole life policy is simplest, but other types of permanent coverage might be a better fit based on your health and financial goals.

3. Compare companies and quotes: Every company has its own underwriting rules, so one may offer you lower premiums than others. Shopping around ensures that you don’t miss out on the best deal.

4. Compare cash value interest rates: There’s a minimum rate of return on your accumulated cash value, but that rate varies by insurer. Plus, some providers pay dividends—cash bonuses based on company performance—while others don’t, and rules around accessing the cash value can differ too.

5. Ask about riders and policy options: Not every insurer offers the same riders or nonforfeiture options—features that keep your policy from lapsing if you stop paying premiums—and costs for adding riders can vary too. 

6. Check trusted third-party agencies: Check organizations like A.M. Best and the Better Business Bureau, which rate a company’s financial health and customer satisfaction, respectively. 

Once you’ve chosen an insurance company and policy terms, the steps for buying coverage are straightforward: you’ll fill out your application, then have a phone interview and a medical exam (you can’t skip the exam for most traditional whole life policies). 

The insurer will review your application materials and medical records and issue you an offer of coverage. Once you sign the policy paperwork and pay your first premium, you’re covered for life.

→ Learn more about the best whole life insurance companies

Pros and cons of whole life insurance

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

Alternatives to whole life insurance

• Term life insurance: Because term life insurance is so much cheaper than whole life insurance, 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

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.