The Fundamentals of Whole Life Insurance

What Is Whole Life Insurance? 

Whole life is a variety of insurance that covers a policyholder for their entire life. In addition to the permanent coverage (so long as you pay your premiums), a whole life insurance policy offers a tax-free payout (in the form of the death benefit), a cash value savings component, and tax-deferred interest accrual. This is in contrast to term life insurance, which lasts for a set period; whole life insurance provides permanent, lifelong coverage.

Whole life insurance attracts policyholders for its unique benefits and guaranteed coverage. Premium rates are set upon enrollment in a whole life policy and remain the same regardless of health changes. Whole life insurance provides coverage for as long as premium payments are paid.

The Value of the Life Insurance Coverage

Life insurance is invaluable not only for its death benefit payout but for confidence in your family’s ability to acclimate to the financial realtities of your passing away. According to a recent study, 68% of households say they would be financially secure if the primary wage earner suddenly passed away, versus 47% of households that do not have life insurance. 

Further, the number of seniors in the U.S. will double by 2050. People are living longer and require more health and family services. This, paired with the devastating COVID-19 pandemic

led life insurance payouts to a record high of $100 billion in 2021, according to the American Council of Life Insurers. 

Many rely on life insurance benefits for income replacement, debt resolution, and funeral and burial costs. Specifically, whole life insurance features unique benefits, including permanent coverage, a cash value component, and investment options.

How Does Whole Life Insurance Work?

Whole life is a distinct form of permanent life insurance. Permanent life insurance is a broader category encompassing various policies, including whole life, offering lifetime coverage and potential cash value, but it may also include universal life and variable life insurance policies, which offer more flexibility but come with varying investment components and risks.

Whole life insurance is a type of permanent life insurance that provides lifelong coverage with a guaranteed death benefit and an accumulating cash value component.

Key Features of Whole Life Insurance 

• Coverage lasts for the lifetime of the policyholder as long as premiums are paid
• Premiums are higher than term life insurance but set at a fixed rate for the duration of the policy
• Policies accrue cash value with each premium paid
• Policyholders may borrow against the policy by taking out a policy loan once premium payments accumulate enough cash value in the account (typically over several years)

Coverage Length

Unlike term life coverage, which only lasts for a set period of 10-30 years, whole life insurance is permanent and lasts until the policyholder dies or cancels the policy. The lifetime coverage of a whole life insurance policy means a guaranteed death benefit for its beneficiaries, beginning with the payment of the first premium. This guaranteed payout underscores the primary function of life insurance coverage to protect your loved ones in the event of your death.   

Cash Value Feature

Unlike term life insurance, whole life insurance policies include a cash value that accrues over time whenever your premiums are paid. The more premium payments you make, the higher the cash value of your whole life insurance policy.

Your whole life insurance policy may include a guaranteed cash value growth rate, which means your plan’s cash value will increase by at least the minimum annual fixed rate, tax-deferred. Your policy may also earn dividends, extending its value beyond the minimum growth rate.

Whole life insurance policyholders can also borrow against their cash value if necessary. You may take out a policy loan once you have accrued enough cash value, typically after several years of paying premiums. You must pay back the loan with interest, or the loan amount will be deducted from the death benefit. 

Rider Options

Riders are add-on features that can enhance your whole life insurance benefits. Common types include:

• Accelerated death benefit rider: This rider pays policyholders a portion of the value of their policy if they become terminally ill and have less than a year to live. Some policies automatically include this rider, while others require a separate purchase.
• Waiver of premium rider: If a policyholder becomes disabled after enrolling, a waiver of premium rider ensures their premium still gets paid.
• Guaranteed insurability rider: This rider ensures the policyholder can purchase new coverage without undergoing a medical exam. This feature primarily benefits policyholders who become disabled after purchasing whole life insurance.
• Child rider: A child rider pays out a death benefit if a child under the age of 25 on your policy passes away. Policyholders may choose this add-on instead of purchasing a separate policy for their child.
• Long-term care rider: This rider enables policyholders to use a portion of their death benefit to cover long-term care expenses while they are still alive. This option suits policyholders, including those with Alzheimer’s or dementia who need assistance in performing daily activities.
• Accidental death benefit rider: Policies with this rider pay out an additional death benefit if the policyholder dies from an accident such as a car crash, construction-work-related fall from a building, or machine-work-related fatality.

Types of Whole Life Insurance

	Premiums	Cash Value Growth	Investment	Risk Tolerance Level
Traditional Whole Life	Fixed	Fixed rate	None	Low
Universal Whole Life	Flexible	Guaranteed minimum return	Optional	Moderate
Indexed Universal Whole Life	Flexible	Guaranteed minimum return	Optional	Higher risk, potential for higher rewards
Variable Whole Life	Flexible	No guaranteed minimum return	Optional; similar to mutual funds	Higher risk, potential for higher rewards

Traditional Whole Life Insurance 

Also called straight life or permanent life insurance, traditional whole life insurance describes coverage with a guaranteed death benefit for the policyholder’s lifetime. Traditional whole life insurance features fixed premiums and a cash value component, allowing policyholders to borrow against the cash value by taking out a policy loan.

Universal Whole Life Insurance

Universal and traditional whole life insurance share many of the same features; however, the policies differ in how they accrue cash value and disseminate death benefits. Only a guaranteed universal life insurance policy guarantees a death benefit payout. Other types of universal life insurance include non guaranteed, indexed, and variable, each with fluctuating growth rates and flexible premiums based on age and health. Universal life insurance best suits individuals looking for flexibility in how they accumulate cash value and pay premiums.  

Indexed Universal Whole Life Insurance

The performance of an indexed universal whole life insurance policy depends on the fluctuation of market index funds like the NASDAQ and S&P 500. Your insurer may enable your policy to earn interest on its cash value when these market index funds perform well, though some insurers cap the rate of return. Indexed coverage suits individuals willing to brave a fluctuating market to potentially accumulate more interest and grow their cash value amount.

Variable Whole Life Insurance 

Variable whole life insurance lets the policyholder decide how to diversify funds to grow their cash value. Policyholders may invest in bonds, stocks, or mutual funds and allocate portions of their cash value to multiple accounts for this type of coverage. High income individuals with the means to withstand potentially slow yet steady gains best suit this type of policy.

Whole Life Insurance vs. Term Life Insurance

	Whole Life	Term Life
Coverage Length	Lifelong; permanent	Set terms; typically 10-30 years
Premium Cost	Higher	Lower
Renewals	None needed	Needed once term ends for continued coverage
Death Benefit	Guaranteed	Not guaranteed; payout if policyholder dies during active term
Cash Value	Yes	No
Best For	Policyholders looking to grow the cash value of their policy, pay a fixed premium rate, and guarantee coverage for a lifetime	Policyholders in their child-rearing years, of retirement age or with a chronic illness, or seeking a low monthly premium rate

Term life insurance and whole life insurance each serve policyholders in unique ways.

Term life offers low premiums and temporary coverage, offering flexibility. Whole life insurance requires higher premiums but offers permanent, guaranteed coverage, with the ability to save and grow your wealth. Keep in mind that some term life insurance plans allow conversions into permanent policies, as a policyholder’s needs and financial goals for their beneficiaries may change over time. 

How Much Does a Whole Life Insurance Policy Cost?

The cost of a whole life insurance policy varies according to factors like your age, health, and whether you smoke. With their permanent, comprehensive coverage and cash value component, whole life benefits inherently cost more than term life insurance. Still, the cost of your individual coverage also depends on the type and amount of coverage you need. The average monthly cost of a $500,000 whole life insurance policy for a 35-year-old non-smoker ranges from $480-$615.

Factors That Affect Your Whole Life Premium

• Type of whole life policy: The cost of whole life coverage varies by plan, ranging from fixed premium rates for traditional whole life insurance to flexible premiums for universal, indexed, and variable policies.   
• Coverage amount: Costs tend to be commensurate with the coverage amount you need from your whole life insurance plan, so you should calculate your individual coverage needs using a technique like the 10X income-replacement or DIME (debt, income, mortgage, and education) method.
• Your age: Generally, young and healthy policyholders pay lower premiums than older people in poor health.
• Medical underwriting results: Most whole life policies require the same medical underwriting procedures found in other forms of life insurance. However, Guaranteed issue whole life insurance plans do not require full medical underwriting, instead relying on a health questionnaire. This system provides the ability for those who may be denied coverage elsewhere to enroll in life insurance. Keep in mind that these policies come with significantly higher premiums and are rarely utilized.
• Your occupation and hobbies: Individuals involved in high-risk occupations or hobbies may pay higher premiums for whole life insurance than low-risk policyholders. Insurers may require especially vulnerable individuals to pay extra to obtain lifetime coverage.
• Policy endorsements or riders: Policy endorsements or riders offer amendments to your existing plan or additional benefits, respectively, and usually require an extra fee, though some policies automatically include select special features. Examples include switching fees for convertible policies and accelerated death benefit riders. 
• Tobacco Use: Given the dangers of Tobacco use, smokers and users of other forms of nicotine face significantly higher costs associated with obtaining and keeping life insurance.

Benefits and Drawbacks of Whole Life Insurance

Purchasing a whole life insurance policy is a highly personal decision. You should consider a wide range of pros and cons to determine which type of coverage can meet your needs. 

Benefits of Whole Life Insurance 

• Lifetime coverage: Whole life insurance is permanent, meaning beneficiaries receive a death benefit regardless of when the policyholder dies, as long as premiums are paid.
• Level premiums: Whole life insurance premium rates remain level for the life of the policy, making long-term budgeting easy and convenient.
• Cash value accumulation: A whole life policy accrues tax-deferred funds toward its cash value, which can be withdrawn or borrowed against for expenses like emergencies or retirement.
• Policy loans: Whole life insurance policies typically offer lower interest rates than traditional loans and do not require credit checks for policyholders.
• Potential for dividends: Participating whole life insurance and other types of whole life coverage may pay dividends, which may help increase the death benefit, add to the policy’s cash value, and reduce monthly premium costs.
• Potential for estate planning benefits: Whole life insurance benefits allow policyholders to budget for funeral and income replacement costs for their beneficiaries or donate a portion of their estate to a charitable cause after they pass away. The funds remain a part of the policyholder’s estate (instead of being consumed by the IRS) until the funds are disbursed to the beneficiaries as outlined in their contract.

Drawbacks of Whole Life Insurance 

• Higher premiums: Consumers must pay higher premiums for whole life insurance to enjoy special features, including guaranteed death benefits, cash value accumulation, and lifetime coverage.
• Complexity: Whole life insurance policies offer various add-on options, riders, and investment components to consider, often making them more complex and overwhelming than term life plans for new customers to navigate.
• Limited investment options: While some consumers are drawn to the investment potential of a whole life insurance policy, the investment options for this type of insurance are often more limited than other ventures such as stocks or mutual funds.
• Potential for reduced returns: Whole life insurance policies tend to be conservative by nature and may yield lower returns than other investment vehicles due to costs like commission fees; however, return rates vary for different types of whole life insurance.

How to Get Whole Life Insurance

Once you decide to purchase a whole life insurance policy, there are still some key considerations needed to guide you toward the enrollment process. You can now begin to pin down the details of your plan, including which type of coverage you need and how much.

1. Assess your financial needs and goals: Before enrolling in a whole life insurance plan, you should make sure this type of plan meets your financial needs. Consider estimating the amount of coverage you need using a method like the DIME technique. The ultimate goal is ensuring you have the coverage your loved ones can rely on after your death.
2. Compare your whole life insurance type options: You can explore a variety of whole life insurance types based on how much you can afford to pay in premiums for your desired coverage amount. You can also explore investment options and methods of growing the cash value of your plan for added protection for your beneficiaries.  
3. Evaluate potential insurance companies: Insurance ratings and consumer protection agencies compare insurance companies for your protection before you buy a policy. Look for criteria, including financial strength ratings and customer service reviews, and communicate directly with your insurer to discuss available policy options.
4. Consult with a trusted agent or financial advisor: You may have a financial advisor you regularly consult before making a significant purchase, such as a life insurance policy, or seek out an insurance agent specifically to advise you in this matter. Estate planners may also have invaluable insight for individuals with unique whole life insurance needs.  
5. Select your preferred policy and apply: Once you have chosen your plan, you should inform your insurance agent of your intent to apply for that coverage. You must list at least one beneficiary on your whole life insurance policy. Some individuals ask a lawyer to review the contract before enrolling in the policy.
6. Undergo medical underwriting and receive your results: While whole life policies do not require ongoing medical exams that could affect your coverage or premium costs, some plans require an initial medical underwriting process for new policyholders. In this case, the insurer examines the policyholder’s medical history and habits to assess their insurability.  
7. Pay your first premium and receive proof of coverage: You may make monthly or annual premium payments or pay the entire cost of your policy upfront. A policy typically goes into effect once the policyholder signs the contract and pays their first premium. The insurer maintains proof of coverage and can share a copy to keep in your files. 

What This Means For You 

For those who can afford higher (set) premiums than term life, whole life coverage guarantees a death benefit and includes features like a cash value component and borrowing options. You can choose from various whole life policy types, depending on your financial planning goals and the amount of coverage you require for your beneficiaries at payout.