Whole life insurance

Whole life insurance is a permanent policy with exceptionally high premium rates. But does the policy’s cash value make the cost worth it?

Nupur GambhirPat Hanzel

Nupur Gambhir & Patrick Hanzel

Published June 25, 2020

KEY TAKEAWAYS

  • Whole life insurance is a type of permanent life insurance that has a savings component called the cash value

  • The cash value of a whole life insurance policy is guaranteed, growing at a generally low rate

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

You probably already know you need some form of life insurance to protect your family financially. What you may not know is how all of these different life insurance policies compare. A lot of terms get thrown around and it’s hard to keep up.

Like all life insurance products, whole life insurance is designed to provide financial protection for people or organizations you care about in the event of your death.

What is whole life insurance?

Whole life insurance is a type of permanent life insurance (also called cash value life insurance), which is one of the two major categories of life insurance. (The second major category is term life insurance).

The biggest difference between these two categories is that term life insurance ends after a set number of years; it offers a death benefit and nothing more. Permanent policies like whole life insurance, on the other hand, cost more because they include an extra savings component, which is referred to as the “cash value.”

How does a whole life insurance policy work?

There are three major parts of a whole life policy:

  1. The death benefit is a tax-free chunk of cash paid out by the life insurance company if you die. For example, let’s say you buy a whole life insurance policy with $500,000 in coverage. That $500,000 is the death benefit.
  2. A beneficiary is the person or people that receive the death benefit. Beneficiaries can be your spouse, your kids, a trust, a business partner, a friend, a non-profit organization and other legal relationships and organizations.
  3. Your premiums are how you pay for your life insurance policy. You usually pay monthly or annually.

Whole life insurance lasts for your whole life — as long as you keep paying the insurance premiums. That means if you buy it when you’re 30 and keep paying your premiums until you die at 85, your family will receive the death benefit.

How does the cash value part of whole life insurance work?

When you pay your life insurance premium, a certain percentage goes into a tax-deferred savings component, known as the cash value of the policy.

The cash value of your policy earns interest and grows tax-deferred over time, at a rate determined by your individual policy. The growth rate is generally on the low end compared to other investments because life insurance companies have additional expenses (like policy administration expenses, underwriting costs, and death benefit payouts) that a pure asset manager does not.

However, life insurance companies often guarantee a certain amount of growth every year, which is one reason whole life insurance products attracted many people following the 2008 recession.

Here’s where whole life insurance (and permanent life insurance in general) can get confusing:

You can access the cash value of your policy in a few different ways, but each comes with certain risks.

  • You can withdraw money tax-free from the cash value of your policy. However, if you completely surrender your policy or your policy lapses, any money you’ve withdrawn over your basis (that is, the portion of the cash value that’s drawn from your premiums) will be taxed as income.

  • You can take out a low-interest loan. In this case, you’re borrowing against your life insurance policy. As with other loans, a cash value loan accrues interest until you pay it back. And if you die before you pay your cash value loan back, the amount you owe (including interest) will be deducted from your death benefit.

  • You can collect the cash value by surrendering your policy. But keep in mind that most of the growth in your cash value happens when you’ve held the policy for two or three decades, so if you surrender within the first ten years, it’s unlikely that your cash value will be greater than the total premiums you have paid. Some life insurance companies also charge a surrender fee, so you should check with your carrier before terminating your policy.

Note that the cash value of your whole life policy is separate from the death benefit. While your beneficiaries are guaranteed to receive the death benefit when you die (provided you’ve paid your premiums), the cash value component can only be utilized while you are living.

This can be confusing to shoppers who believe that in the event of their death, their beneficiaries will receive both the death benefit and the accrued cash value. However, anything that remains of your policy’s cash value when you die will be retained by the insurance company.

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Whole life insurance quick facts

FEATURESWHOLE LIFE INSURANCE OVERVIEW
Average DurationLife
Average Cost5-15x more than term
Guaranteed Death Benefit?Yes
Guaranteed Cash Value?Yes
How Cash Value GrowsEarns interest at a rate determined by your carrier
PremiumsLevel
NotesNo risk compared to other permanent types, but you may find better investment options elsewhere

How much does a whole life insurance policy cost?

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 five to 15 times more expensive than term life.

"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 Specialist 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."

Learn more about certified financial planners and what they do.

Whole life insurance policy sample rates

LIFE INSURANCE COVERAGE AMOUNTMONTHLY PAYMENTANNUAL PAYMENT
$100,000$89/ mo$1,030/ year
$250,000$212/ mo$2,440/ year
$500,000$420/ mo$4,800/ year
$1,000,000$827/ mo$9,510/ year

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. Quotes based on policies offered by Policygenius in 2020.

Many people overestimate their ability to pay the large premiums year after year. Approximately 30% of whole life insurance policies are surrendered within the first three years and 45% are surrendered within the first ten years, according to a study by LIMRA and the Society of Actuaries (SOA).

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, Advanced Planning Specialist and Certified Financial Planner at Policygenius

Pros and cons of whole life insurance

Typically, term life insurance is the better policy option for most people, but there are some benefits to whole life insurance that can make it a good policy option for certain people, such as individuals with a high net worth or life-long dependents. Like all life insurance policies, whole life insurance comes with its own set of benefits and drawbacks that are worth considering when you’re purchasing a life insurance policy.

Whole life insurance benefits

  • Whole life insurance lasts for your entire lifetime as long as you keep making premium payments.

  • Your premiums typically stay level for your entire lifetime, which means your insurance company cannot raise prices as you get older or if you get sick.

  • Some of your premium goes into a tax-deferred savings account with interest, called the cash value.

  • Because a portion of your premium is put aside into a savings account, you can potentially recapture some of the money you’ve spent on your life insurance payments.

  • Your returns are usually guaranteed as the life insurance carrier sets a guaranteed minimum growth rate on the cash value, though the growth can vary wildly from year to year.

  • Because your returns are guaranteed, your cash value will grow even if other investments lose value and you won’t lose any money if the stock market tanks.

Whole life insurance drawbacks

  • Whole life insurance costs five to 15 times as much as a comparable term policy which leads to the surrender of most whole policies.

  • If you surrender your policy too early, you can expect your cash value to be very low due to only a small percentage of your premium going into the savings account while the rest is used to pay for upfront costs like administrative fees and the agent’s commission.

  • While the forced investment aspect of whole life insurance can help some people save, most dedicated investment options (like a mutual fund or IRA) will provide a better return over the long run.

  • If you withdraw from your savings account in any way (such as a loan to yourself), the insurance company will charge you administrative fees, penalties, and other charges, and you’ll pay a tax penalty, which will eat into any earnings you’ve made on your savings.

What alternatives are there to whole life insurance?

  • Term life insurance. Term life insurance is a lot like the life insurance part of whole life insurance, except that it ends after a specified number of years. Because term is so much cheaper than whole life insurance, you can buy a lot more coverage (meaning a larger death benefit) for the same amount of money. Term is popular among financial experts because it’s relatively cheap and easy to understand. It is pure protection, with no cash accumulation component. Learn more about whether you should buy term or whole life insurance.

  • Other permanent (cash value) life insurance. There are other types of permanent life insurance policies besides whole. They are called variable life insurance, universal life insurance, and variable universal life insurance. These all differ in how the cash value portion of the policy works. Whole life is the simplest and least risky version because its cash value portion is a simple savings account, whereas the other three all incorporate an investment product with variable returns.

What's the best whole life insurance company?

Many major insurance companies, like AIG, Mutual of Omaha, and Transamerica offer types of whole life insurance.

While insurance companies are the ones who offer whole life insurance policies, you shouldn’t try to buy them directly from the companies.

Instead, you should go through an independent agent or broker like Policygenius, who can help you compare whole life insurance policies from a variety of companies. This advice is the same if you’re looking for term life insurance as well.

Learn more about how the best life insurance companies rank.

Whole life insurance companies

There are multiple types of whole life insurance policies, and the one you want will depend on your individual needs. Most of the top life insurance companies offer some sort of whole life insurance, though the type of whole life insurance policy you can get varies for each insurer. You'll want to work with an agent to determine the right life insurance company for your individual needs.

Those looking for traditional whole life insurance policies will likely be able to find one through MassMutual and Guardian Insurance. But if you're just looking to cover end of life expenses, such as funeral costs, then you'll want to explore your options with AIG or Mutual of Omaha.

And if you're looking for universal life insurance, a type of whole life insurance, look no further than any insurer that partners with Policygenius.

How to buy a whole life insurance policy

Before you get a whole life insurance policy, you should make sure permanent coverage is in line with your needs. Most people are better off with term life insurance — it's exponentially cheaper for the same amount of coverage. But if your circumstance warrants a whole life insurance policy (perhaps because you have a high-net-worth or permanent life insurance needs), then you'll undergo the typical underwriting process to get a traditional whole life insurance policy, which includes an initial phone interview with a Poligygenius and a medical exam conducted by the insurer.

If you're opting in for final expense insurance, which offers much less coverage, then the application process is a little more cut and dry: you'll talk through your needs with the life insurance agent and pay your first premium, putting your coverage in force.

How Policygenius helps you get the right policy

Speaking to a Policygenius agent is the best way to determine if the high cost of whole life insurance is worthwhile depending on your individual needs. Policygenius agents make no commission and aren't incentivized to promote specific life insurance policies. Instead, they qualify your background to determine what type of policy and coverage best suits you — and where you can get it at the lowest price point.

Alongside that, they're with you every step of the way to ensure a seamless underwriting process and financial protection for the people you love.

Is whole life insurance worth it?

While many agents, brokers, and insurers argue in favor of permanent life insurance policies like whole life insurance, these products do have their critics, including popular financial personalities like Dave Ramsey, Suze Orman, and Clark Howard.

Whole life insurance products, however, are useful for some people. For those with high incomes who have already maxed out their other tax-deferred accounts, whole life insurance can be a useful part of managing your estate. And if you have a special needs dependent who will need care after you are gone, whole life is a good option.

But for the vast majority of people — and especially the 45% who surrender whole life insurance policies within the first 10 years — a term life insurance policy is the better option. You’ll get more coverage at a cheaper rate than you would with whole life insurance, making it more affordable for the decades that you’ll be paying premiums.

It’s also a good idea to avoid combining insurance and investment or savings. Insurance is not an investment, and shouldn’t be treated as an investment vehicle. If you’re trying to put together a long-term financial strategy, get expert help from a financial adviser or tax expert. They can help you structure your finances in such a way that you pay the least amount of tax and have a high growth rate.

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