Whole life insurance features guaranteed coverage for your entire life, as long as you pay premiums. These policies contain savings features that enable you to build cash value, which can be withdrawn tax-free. Depending upon your age and health, whole life insurance rates may range from about $80 to $3,000 per month.
You can get accurate insurance rates specific to your needs with an online service like Policygenius, where you can easily compare rates from multiple providers and get whole life insurance quotes quickly. You can get whole life insurance quotes online with Policygenius in just two minutes.
How Whole Life Insurance Works
Also called ordinary life or straight life, whole life insurance offers coverage that is guaranteed for your entire life and eventually pays a death benefit to your beneficiaries. Because a whole life insurance policy builds cash value as you pay premiums, it also serves as a savings vehicle. For example, the cash value earns interest, can be borrowed against, or can be withdrawn.
When you apply for whole life insurance, you select an amount of money, called a death benefit, to be paid out to your beneficiaries when you die. After your death, your beneficiaries will receive the death benefit amount, which is called the face value. The cash value is not typically paid to beneficiaries in whole life policies.
Whole life insurance is the most popular type of permanent life insurance policy primarily because of its lifelong coverage and cash value feature. Even if the health of the policy owner declines, the coverage stays in place, as long as premiums are paid.
The permanent coverage and cash value features of whole life are the primary differences when compared to its primary alternative, term life insurance. With a term life policy, you get coverage only for a specified period of time, such as 10, 15 or 20 years, and there is no cash value. The trade-off for lifelong coverage and cash value with whole life vs term life insurance is that the premiums are seven to 10 times higher than term life.
Whole Life Insurance Is Permanent Coverage
Permanent coverage is the primary feature of whole life insurance and is also its greatest benefit. As long as you pay premiums, the death benefit is guaranteed throughout your life. At death, your benefits receive the face value of the benefit. For example, if you buy a $100,000 whole life policy, and pay premiums, your beneficiaries will receive $100,000 at your death.
Whole Life Insurance Premiums Stay Level for Life
Whole life insurance premiums are typically paid on a monthly basis and remain the same throughout life. For this reason, they are called “level premiums.” The advantage to level premiums is that they do not increase with age. For example, if you get a whole life insurance policy at age 25, your premium payment will be the same at age 65 and for your entire life.
Whole Life Insurance Cash Value
Whole life insurance policies have cash value, which accumulates and earns interest on a tax-deferred basis over time. The primary benefit of the cash value feature of whole life is that you can access this cash while you are living. Access to cash while you are still living is sometimes referred to as a living benefit.
Here are the main things you can do with your whole life insurance cash value:
- Increase Death Benefit: Some insurance providers will allow you to give up your cash value in exchange for increasing the death benefit.
- Pay for Life Insurance Premiums: Once you have built up enough cash value, you can use it to pay premiums. This is called “paid up” life insurance and most insurance companies will add this option as a rider.
- Take Out a Loan: Once you’ve built up your cash value, you may choose to borrow from it, usually at rates lower than you would pay with a bank loan.
- Make a Withdrawal: You can withdraw from your cash value for any reason, such as a large purchase or paying off debt. However, the withdrawal may reduce your death benefit. Therefore, consult with your insurance representative before making a withdrawal.
Another important feature and benefit of cash value is that it is shielded from creditors. This is because a whole life insurance policy is ultimately intended as a benefit for someone other than you, which applies to the cash value you’ve built in your policy.
Dividends Available Through Participating Policies
Whole life insurance policies that pay dividends are called “participating policies,” and they can only be purchased from mutual insurance companies, which are owned by the policyholders. This is contrast to stock insurance companies that are publicly owned and do not pay dividends to policyholders.
Guaranteed Death Benefit
The death benefit of a whole life policy is normally the stated face amount. However, if the policy is “participating,” the death benefit will be increased by any accumulated dividend values and/or decreased by any outstanding policy loans (see example below). Certain riders, such as an Accidental Death benefit, may exist, which would potentially increase the benefit.
Types of Whole Life Insurance
There are several types of whole life insurance. Here are the basics on each type:
- Non-Participating Whole Life Insurance: With this whole life policy, the premium and the face value of the death benefit remain the same for your entire life. The policy is non-participating because it does not pay dividends.
- Participating Whole Life Insurance: This type of whole life policy pays dividends, which come from profits of the insurance company. The dividends can be paid in cash, reduce your premium, accumulate with interest, or purchase “paid-up” additional insurance.
- Level Premium Whole Life Insurance: This is the most basic type of whole life insurance. The premium stays the same for life, which is why it called a level premium. Since the premium is higher than needed to pay for life insurance, the excess amount is held and invested by the insurer, creating “cash value” in the policy.
- Limited Payment Whole Life Insurance: As the name suggests, limited payment whole life insurance allows you to pay premiums for a specified number of years, such as 10 or 20. Limited payment policies can also be paid up by a specific age, such as 65.
- Single Premium Whole Life Insurance: This policy is paid up in full with one large, lump sum payment. These policies are sometimes used for investment purposes.
Pros & Cons of Whole Life Insurance
Whole life insurance offers some valuable benefits but it may not be right for everyone. For example, whole life insurance allows for lifelong coverage and level premiums, but you may end up paying for the coverage for more years than needed. Therefore, it’s wise to carefully consider both the pros and the cons of whole life insurance before you make a final decision about the type of life insurance you need.
Pros of Whole Life Insurance
Whole life insurance has a few key advantages or pros to know about before deciding if the policy is right for you. For example, the lifelong coverage and cash value are popular features that people find to be advantages of whole life insurance.
Whole life insurance pros include:
- Permanent Coverage: As its name suggests, whole life insurance is guaranteed to remain in force for your entire life, as long as you continue to pay premiums.
- Cash Value: Whole life policies build cash value over time, which creates a savings feature for the policy owner.
- Living Benefit: The cash value of a whole life policy enables a living benefit, which means that you can make withdrawals or borrow from the cash value while you are living.
Cons of Whole Life Insurance
The cons of whole life insurance may be considered trade-offs for the pros of whole life. For example, the permanent coverage and cash value savings features are advantageous, but the primary trade-off is that whole life policies are expensive, especially compared to a term life insurance policy.
The cons of whole life insurance include:
- High Premiums: Because of the permanent coverage and cash value features, the premiums for whole life insurance can be up to ten times higher than the premiums for term life insurance. Plus, most people won’t need the coverage until many years or decades after buying the policy.
- Mediocre Returns on Cash: According to Consumer Reports, the average rate of return on whole life cash value is 1.5 percent, whereas a stock mutual funds have historically averaged about 8 percent annually.
- Difficult to Understand: The multiple benefits and features of whole life insurance, such as cash value, living benefits, and how these compare to term life insurance, add to its complexity and consumers may buy the policy when term life could have been the better option.
Who Whole Life Insurance Is Right For
In general, life insurance is right for people who want to protect dependents who would suffer financially if the policy owner died, especially those who want coverage for their entire life. This makes whole life attractive for people who fear declining health later in life. Some people may also be attracted to the cash value savings feature of whole life insurance.
There are a few basic types of people for whom whole life insurance is right, according to Ty Stewart, Founder of Simple Life Insure:
“People who are concerned about outliving a term policy or are worried about declining health later in life, making them uninsurable, should consider whole life insurance. High net worth individuals may also use a whole (or other form of permanent) life policy as a means of investment diversification, since it builds cash value with interest, above and beyond the death benefit.”
Small businesses may also buy a whole life insurance policy to protect against financial loss if a key person dies or is disabled. For example, whole life insurance may be used to fund a key man insurance policy or a buy-sell agreement for small business. However, most small businesses use term life insurance for this coverage.
According to Joe Hogan, Mariaca Wealth Management:
“Whole life insurance typically does not make sense for business owners. After separation from the business, the need for life insurance no longer exists. It often does not make sense for the business or business owner to pay the higher premiums for whole life insurance when there is not a permanent need.”
Whole Life Insurance Rates
The cost for whole life insurance may be seven to ten times more than a comparable term life insurance policy. The reason for this is that whole life policies provide coverage for the entire life of the insured person, as long as premiums are paid. However, term life insurance provides coverage for a specified period, after which coverage ends or is renewed at a higher premium.
For an example of average life insurance rates for whole life versus term life, a healthy 25-year-old could get a 20-year, $500,000 term life policy for about $40 per month, whereas the same death benefit for a whole life policy would be around $350 per month.
Sample Whole Life Insurance Quotes by Age and Death Benefit
The sample whole life insurance quotes above are from Insurance & Estates. The quotes are average monthly rates based on a preferred-plus (non-smoking) male. Keep in mind that these rates are estimates and may not reflect the actual rates you would pay. To get accurate whole life insurance quotes quickly and easily from a variety of providers, you can use Policygenius.
Best Whole Life Insurance Companies
Whole life insurance is a standardized insurance product, which means its features and benefits will be essentially the same no matter which insurance provider you use. Therefore, when you make the decision to purchase a policy, it’s important to focus on the best price from highly-rated providers. Another factor in the decision is if the provider pays dividends to policyholders, which can help build cash value.
We researched five insurance companies and businesses that offer whole life insurance:
Policygenius provides a service that helps you compare insurance quotes from multiple, highly-rated providers on a range of insurance types, including whole life, term life, disability, renters, auto insurance and more. Policygenius is ideal for individuals wanting to compare whole life insurance quotes and to apply online. They also offer access to expert help if needed.
New York Life is the largest mutual insurance company in the United States and is among the largest providers of life insurance in the world. It thus goes without saying that this company has a few things figured out. New York Life can be a smart choice of provider for people who like reliable dividend payments. Keep in mind that their agents are captive, which means they tend to promote their own products first.
MassMutual is a large, national insurance provider that is known for its dominance in the whole life insurance market. Their popularity among policyholders stems from their consistency in paying generous dividends, which makes them a top choice for cash value accumulation. MassMutual is a smart choice for anyone who is looking for a whole life insurance provider that pays dividends and focuses on wealth building over time.
Another one of the top dividend-paying mutual insurance companies in the U.S., Northwestern Mutual is also a highly-rated insurance company that receives an A++ rating from A.M. Best, a rating agency that focuses on the insurance industry. Northwestern Mutual is a good choice of provider for individuals wanting a full range of financial products and services in addition to life insurance.
Like most of our other top providers for whole life insurance, State Farm is a large, national insurance carrier with local agents located all around the U.S. Their whole life insurance rates begin at $78 per month for $100,000 of coverage. State Farm can be a good choice of provider for individuals who want straightforward whole life coverage at a low cost.
Alternatives to Whole Life Insurance
There are several alternatives to whole life insurance, which means it’s important to understand the key differences before choosing the best life insurance policy for you and your beneficiaries. For example, many individuals and small businesses find the simplicity and low cost of term life insurance to be preferable to the higher costs and multiple features of whole life.
The three primary alternatives to whole life insurance are:
1. Term Life Insurance
Term life insurance is the most common alternative to whole life insurance because the features and benefits of the two insurance types are fundamentally different. The main difference between the two is that term life is temporary coverage over a specified period of time, such as 10, 15, 20, or 30 years, whereas a whole life insurance policy remains in force throughout life as long as premiums are paid.
Term life insurance is a better choice than whole life for most people, according to Anthony Criscuolo, Certified Financial Planner (CFP), Enrolled Agent (EA), Palisades Hudson Financial Group:
“While the idea of a tax-sheltered cash value inside a whole life policy can be appealing, you are usually better off paying the lower premiums of a term policy and saving the extra dollars in a separate account yourself. As the saying goes, ‘buy term and invest the difference.’ With the embedded fees and costs of whole life insurance, you are usually better off making your own investment decisions and just buy the less expensive, pure insurance term policy.”
2. Universal Life Insurance
Universal life insurance is similar to whole life in that it is a form of permanent life insurance that builds cash value, which comes from payments from the insured that are in excess of the premium payment. Universal life is different from whole life in that the death benefit can increase and the premium payments are flexible. Universal life can be right for people who want permanent life insurance coverage with flexible premium payments.
3. Variable Universal Life
Variable life insurance, which is usually called variable universal life (VUL), is another form of permanent life insurance like whole life. However, the cash value that builds in the policy can be invested in separate accounts, which work like mutual funds. Therefore, VUL may be right for people who want permanent life insurance with the ability to invest the cash value. As with universal life, premium payments are flexible with VUL.
Whole Life Insurance Frequently Asked Questions (FAQs)
Whole life insurance has several features and there are several types to choose from. A good way to understand how whole life insurance works is to read the answers to typical questions people ask about it. If you have a question not listed here, feel free to use our Ask a Question forum
1. When is the best time to buy whole life insurance?
The most common time in life when people buy life insurance is when there are other people, such as a spouse or children, who depend on their income. For example, if you earn the majority or all of the income in your household, life insurance is needed to replace your income or pay off debts, such as a mortgage, after you die. Also, at a younger age range, such as your 20s or 30s, whole life premiums, which remain fixed for life, are lower.
2. Is term life insurance better than whole life insurance?
Term life insurance is better when you want to have life insurance during a specific period of time, usually when insurance is needed most, such as the years when your children or spouse are dependent on your income. Also, whole life insurance premiums are often seven to 10 time higher than term life insurance, which makes term life better for people who want cost savings.
Whole life insurance can be a better option when you want to have life insurance coverage for your entire life plus a savings feature, such as cash value that accumulates over time. The permanent coverage feature is also an advantage for people who want lifelong coverage, even if their health is declining. If these benefits and features are worth the higher premiums, whole life could be a good option.
3. What is “cash value” in a whole life insurance policy?
The fundamental structure of whole life insurance is that the premiums are higher than that of pure insurance, such as term life. The extra premium accumulates and this allows for cash value to build up in your policy. The cash earns interest and usually grows tax-deferred. You can make withdrawals or borrow from cash value.
4. Is whole life insurance taxable?
The interest on cash value in a whole life policy is not taxable income. If you receive dividends, they are considered to be a “return of premium,” which means that they are not taxable as long as the dividends you’ve received do not exceed the premiums you’ve paid. The death benefit to your beneficiaries is also free of income tax, although in some cases it may be subject to federal estate taxation.
5. What happens if you surrender a whole life policy?
When you surrender a whole life policy, it means you cease coverage by ending premium payments. Most people surrender a whole life policy for its cash value. The cash surrender value depends on the age of the policy and can be less than the actual cash value for younger policies. Cash value is not taxable unless it is more than the premiums you’ve paid less dividends you’ve received.
Whole life insurance can be a smart choice if you want guaranteed life insurance coverage for your entire life plus a savings feature that builds cash value. However, if you only have a temporary need for life insurance, such as the years during which your premature death would cause a financial burden for your survivors, term life insurance may be a better choice.
The best way to find out if whole life insurance is the best option for you, or if term life may be a better alternative, is to contact a company like Policygenius that can provide detailed information and help you compare life insurance quotes. Policygenius can provide insurance quotes from top providers in just two minutes.