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Whole life insurance is a type of permanent life insurance that offers a savings-like component called the cash value. Like other permanent life insurance policies, whole life insurance lasts your entire life as long as you pay the premiums.

With these policies, the premiums you pay don’t just go toward the death benefit, they also build up cash that you can tap into while you’re alive. 

Let’s take a look at whole life insurance and help you figure out whether these policies make sense for you.

Key Takeaways

  • Whole life insurance lasts your entire life.
  • Part of your premium pays for the cash value, which is a savings-like component.
  • Whole life insurance is significantly more expensive than term life insurance.

What is whole life insurance?

A whole life insurance policy provides a set amount of coverage for your entire life. As long as you pay premiums, your beneficiary will receive the death benefit when you die. It also builds up a cash value, which is similar to a savings account. Part of the premium pays for the cash value and the other part pays for the death benefit. Because of this, whole life insurance costs a lot more than term life insurance

How the cash value works 

Many people purchase whole life insurance because of the cash value. It’s an account within your policy that grows tax-deferred. Your premiums fuel a portion of your premiums, but there is an interest rate on the policy that helps it grow as well. 

The cash value can only be accessed while you’re alive, but it can’t be accessed immediately. It usually takes decades for the cash value to grow enough to be used. 

Once your cash value is built up, you can access it for anything — retirement, your child’s college tuition or the vacation you’ve always wanted. Whole life policies might be eligible to earn dividends (depending on the company and not guaranteed). These can be used in a variety of ways, such as providing paid-up additional life insurance, which increases both the life insurance benefit and cash value.

Your insurer should be able to provide you with a policy illustration to demonstrate the potential growth of your policy.

What is the difference between whole and term life insurance?

Unlike whole life, which covers you until your death, term life insurance provides coverage for a specified period of time, such as 10, 15 or 20 years. For term policies, the premiums increase over time unless you buy a “level term” policy, guaranteeing that premiums stay the same.

Term policies do have a cash value component. Your policy expires when you reach the end of the term, so you may outlive your policy. In that case, your loved ones won’t receive a death benefit when you die. 

You would need to shop for another policy if you wish to still have coverage at the end of your term policy. Some term life policies allow you to convert your policy into a whole policy.

With term insurance, you can get significantly higher coverage amounts for a much lower premium compared to permanent or whole insurance. That’s because there’s a good chance you outlive the term and get nothing for the premiums you’ve paid.

What does whole life insurance cover?

As with any type of life insurance, the death benefit amount you choose at the start of your policy doesn’t have an assigned use. With whole life, these funds usually cover funeral expenses, any remaining debts and provide a small inheritance.

However, the funds could also be used for paying a remaining mortgage loan or to replace lost income of the insured party.

It’s important to note that the death benefit can be used by beneficiaries in any way they choose. Since there’s no legal requirement for them to spend it on the items that you planned, it’s wise to choose your beneficiaries carefully.

You can also choose multiple beneficiaries, allowing you to split up the money between family members the way you want. Any requirement for how the money should be spent, such as paying off a mortgage or college tuition for children or grandchildren, should be specified in a will.

Types of whole life insurance

There are many types of whole life insurance, and the policy you get depends on your life insurance needs: 

  • Burial insurance: Has very low coverage amounts and high premiums. It is meant to cover final expenses, such as the cost of a funeral or final medical expenses.
  • Ordinary whole life insurance: Premiums are level as long as you live. Your policy builds cash value. The initial annual cost will be much higher than the same amount of term life insurance.
  • Limited payment whole life insurance: This policy lets you pay premiums for only a specific period, such as 20 years or until age 65, but insures you for your whole life. As a result, premium payments will be higher than if payments were spread out through your lifetime.
  • Single premium whole life insurance: This policy is paid up after one large initial payment.
  • Modified premium whole life insurance: This policy has a moderate cash-value component and provides a lower premium during the early life of the policy. It still has the ability to accrue cash value that can be accessed tax-free by the policyholder.
  • Survivorship life insurance: Also called second-to-die life insurance, this type of whole life policy insures two lives (typically spouses) and pays out upon the death of the second individual. This is good for people who need to provide for beneficiaries only after both have passed away. It’s also less expensive than insuring two lives under separate policies.

Who should get whole life insurance?

For many people, term life insurance is the better option. It’s more affordable and does what it’s supposed to — protects your beneficiaries from financial hardship if you die. By the time your beneficiaries are financially independent, the policy expires. 

Whole life insurance, on the other hand, is more expensive — but it also lasts your entire life and provides a cash value. People who need this type of permanent life insurance usually have very specific needs that validate the high cost. This includes people with lifelong dependents and individuals with a high net-worth who want to use life insurance as a wealth management tool or to pay estate taxes. 

You may consider whole life insurance for the following reasons:

  • You plan to provide long-term financial support.
  • You want to build up cash value as an additional retirement fund.
  • You want to create an estate for your beneficiaries after your death.
  • Your beneficiaries need the benefit to pay estate taxes when you die.
  • You have a large estate and putting a whole life policy into a trust will protect your beneficiaries from paying hefty estate taxes when they die.

“Whole life does two things for you: protects your family and allows you to save for the future,” says Scott Berlin, senior vice president and leader of the Group Membership Association Division at New York Life.

“Buying term is like renting your insurance,” Berlin says. “You don’t build up any residual value. Whole life is like owning a home — you build up equity.”

How much does a whole life insurance policy cost?

A whole life policy’s price varies greatly depending on your age, health and lifestyle choices. Because it lasts your entire life and has a cash value component, it costs significantly more than term life insurance. 

How to make the most of your whole life insurance policy

James Hunt of the Consumer Federation of America, a retired life insurance actuary and former insurance commissioner of Vermont, says that because of the high fees associated with whole life, you want to look for ways to maximize your premium dollar within the policy.

He suggests these strategies:

  • Avoid riders unless absolutely necessary because they’ll eat into your cash value potential.
  • When you look at the policy illustration — a document that details what could happen with your policy — make sure your first year’s cash surrender value is a significant portion of your first year’s premium outlay. (A good number would be 50% or higher.)
  • If you are looking at cash-value life insurance to possibly supplement retirement income, Hunt advises that you may be better off buying term life and maximizing other tax-advantaged retirement plans first, such as your 401(k), 403(b), IRA or Roth IRA.

Is whole life insurance worth it?

Whole life insurance is a good option for people with specific life insurance needs, such as coverage for a lifelong dependent or an additional estate planning tool. But for most people, term life insurance will be the better choice because of its affordability and simplicity. Usually, traditional investment accounts, such as 401(k), will also yield higher returns.

If your financial needs are complicated, talk to a certified financial planner (CFP) to figure out what strategy is best for you. When you’re ready to shop for coverage, read our guide to the best life insurance companies

Frequently asked questions

What are the benefits of whole life insurance?

Whole life insurance offers life-long protection and lets you build cash value over time. It also provides a tax-free death benefit. 

When can you stop paying premiums on whole life insurance?

A whole life policy covers you for your entire life as long as you pay your premiums.

Does whole life insurance build cash value?

Yes. Whole life insurance has a savings-like component called the cash value, which is built over time as you pay your premiums. Once your cash value builds enough value, you can take out a loan against that amount.

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Nupur Gambhir
Managing Editor

 
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Nupur Gambhir is a content editor and licensed life, health, and disability insurance expert. She has extensive experience bringing brands to life and has built award-nominated campaigns for travel and tech. Her insurance expertise has been featured in Bloomberg News, Forbes Advisor, CNET, Fortune, Slate, Real Simple, Lifehacker, The Financial Gym, and the end-of-life planning service.

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