What Is Whole Life Insurance?

By | September 1, 2021
Whole Life Insurance

Whole life is a type of permanent life insurance. The goal of a permanent policy is to have life insurance in place for the rest of your life. That’s different from term life insurance, which covers you for a specific length of time, such as 20 years.

All whole life policies have three elements: premiums, a death benefit, and cash value. The premium is the amount of money you pay for the policy. Depending on the policy, you pay the premium in either a large one-time lump sum, once a year, or monthly. 

Because you keep a whole life policy for the rest of your life and might not want to be paying for it after you retire, some life insurance companies have other payment arrangements. Northwestern Mutual, for example, offers payment plans for 15 years, 20 years, and 25 years. It can also structure your payments to end when you reach age 65 or 100. With one of these arrangements, your payments are higher over a shorter payment period while ensuring later that your life insurance policy doesn’t lapse when you are on a fixed income in retirement. 

Premiums don’t always remain the same over the course of your lifetime. A policy that was affordable when you were 40 may become too expensive when you reach 65. You can safeguard against rising costs by looking for a policy with premiums that are guaranteed to remain the same. 

The death benefit is the money your beneficiaries receive after your death. You select this coverage level based on your financial needs and goals. We walk you through how to estimate the amount of life insurance you need in our guide on How Life Insurance Works

A portion of your whole life insurance premium is allocated as cash value. This money has several advantages. It can keep your premiums the same throughout your lifetime, with the life insurance company withdrawing from your cash value instead of charging you more as you age. This is also how your policy stays current when you are 75 and you choose a payment arrangement that ends at age 65. 

The cash value tends to grow very slowly and often doesn’t increase at all during the early years of your policy. As it accumulates to a sizable amount, some companies let you borrow this money. You’ll pay fees and finance charges on this loan, and you’ll need to make sure your policy doesn’t lapse because of a lack of funds in your account. 

While your beneficiaries will receive a death benefit after your death, they typically don’t collect any of the cash value that remains. If you cancel the whole life insurance policy before you die – called surrendering the policy – you often get back a portion of the accumulated cash value. 

Some policies pay dividends, similar to an investment like a mutual fund. The amount you receive depends on the company’s performance for the year as well as your cash value. You can elect to receive your dividends as cash, apply it toward your death benefit, or apply it toward your premiums, depending on the policy’s terms. Dividends usually aren’t guaranteed, and some companies have better track records than others of paying these on a regular basis. For instance, MassMutual has consistently distributed dividends for more than 150 years. 

Whether you decide to go with whole life or a different type of life insurance, it’s vital to buy this long-term policy from a reputable company. We rank and review the Best Life Insurance Companies and guide you through How to Buy Life Insurance.

Pros and Cons of Whole Life Insurance

Pros:

  • Guaranteed coverage until you die
  • Lifetime coverage period ensures that you won’t have reapply and undergo a medical exam later on 
  • Can borrow against cash value without a credit check (when applicable)

Cons:

  • Cash value doesn’t get paid to beneficiaries

Who Should Get Whole Life Insurance?

Any adult who is financially responsible for others – such as a spouse, kids or aging parents – should get life insurance. However, whole life insurance is not a good option for many people. Its biggest drawback is that it is much more expensive in comparison to term life insurance. 

You should not get whole life insurance if you are seeking a way to grow wealth that you can use during your lifetime. Even though some policies have a cash value component or pay dividends, earnings typically lag those from other investment vehicles. Furthermore, if you want to tap into your cash value, you’ll typically have to pay interest and other fees to do so. This money also doesn’t pass to your beneficiaries when you die. 

There are a few scenarios where whole life insurance does make sense. If you have a term life insurance policy that is expiring, you may have the option to convert this into a whole life policy without taking a medical exam. This option is appealing if you still want life insurance but have a serious illness or other health concern, which may drastically increase your premiums or disqualify you entirely from getting a new life insurance policy.

How Do You Find the Best Whole Life Insurance Company?

Buying life insurance is no time to cut costs by signing on with an unproven newcomer to the market. You also don’t want to overspend by choosing a company that has excessive commissions and fees. 

Luckily, we’ve done the work for you. We compared premiums from dozens of companies, weighed the advantages and disadvantages of different policies, and scoured countless lines of fine print to name the top-rated providers. You can see our full list of the Best Life Insurance Companies here. Most, but not all, of the companies in our ratings offer whole life policies. 

One thing all of the companies in our ratings have in common is they are well-established businesses. One of the oldest in the list is Banner Life. Its parent company is more than 180 years old. 

You can get a quick snapshot of a company’s financial soundness by taking a look at its AM Best Financial Strength Rating. AM Best is an organization that rates insurance companies worldwide. It assigns ratings in part by evaluating how well a life insurance company can meet its financial obligations. 

Every business in our Best Life Insurance Company rankings has at least a Superior rating from AM Best (A+ or higher). Numerous companies have the highest rating of A++, including Northwestern Mutual, State Farm, and Guardian Life. 

A good life insurance company provides lots of choices when it comes to coverage and premiums so that you can find the best policy to fit your needs. Protective Life, for example, offers nine primary types of policies, along with numerous riders that let you further customize your life insurance. 

A company’s financial rating and selection of policies doesn’t mean much if it delivers poor customer service. Professional and consumer reviews shed some light on how easy a company is to work with, from submitting your application to filing a claim.

See a full explanation of our methodology for more information on how we selected the Best Life Insurance Companies.

What Are the Key Features of Whole Life Insurance Policies?

Whole life is a type of permanent life insurance, meaning it’s meant to be kept for the rest of your life. It’s also known as cash value life insurance.

Like all life insurance products, whole life pays money to your beneficiaries after your death. This death benefit is also referred to as your coverage amount. You choose the level of coverage you want at the beginning of the policy. The amount varies widely from company to company and can be as low as $1,000 or as high as several million dollars. 

Beneficiaries receive death benefits in several different ways. One of the most common ways is as a tax-free lump sum. With some policies, beneficiaries can instead arrange to receive this money in monthly or yearly installments. An annuity option generally pays a small amount on a regular basis and invests the rest, producing extra income for the beneficiary. The beneficiary may have to pay taxes if the death benefit earns interest, though sometimes this can be deferred. 

The premium is what you pay for the policy. In addition to monthly payments, some whole life policies come with other payment arrangements if you don’t want to make a payment every month for the rest of your life. You can choose a specific time frame, such as 15 or 20 years. Some policies structure the payments to end when you reach a certain age. For example, if you elect to have a payment period until age 65, then you can ensure that your whole life policy is paid when you retire. A single premium whole life policy requires one large payment upfront. 

Most whole life plans have guaranteed level premiums. This means you can expect to pay the same amount over your entire payment period. A few, however, increase the payment on a yearly basis. 

One of the key differences between whole and term life insurance is the cash value component. This is a portion of your premium that grows tax-deferred. The money usually isn’t paid to your beneficiaries with the death benefit. It takes a few years for your cash value to grow, typically earning interest at a fixed rate as it accumulates, which is why some also view whole life policies as a savings tool. 

Some companies let you borrow your cash value without checking your credit, though they will charge you fees and interest to use this money. If you withdraw money from your cash value and don’t pay it back before your death, the life insurance company will subtract it from the death benefit. Occasionally, you can tap into your cash value to pay your premiums if you encounter financial hardship. 

A few whole life policies are eligible for dividends. These payouts are usually not guaranteed, but some companies have a well-established history of dividend payments. For 166 consecutive years, New York Life has been paying dividends. 

How Is Whole Life Insurance Approved?

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Getting life insurance starts with an application. This can be completed online or with an agent, depending on the company. The application seeks to get an idea of your current financial picture. It also asks questions about your health. This includes your family’s medical history, checking particularly to see if any close relatives died prematurely from cancer or heart disease. 

A medical exam is part of the application process for many whole life policies. With it, you get a fully underwritten policy, which tends to cost less than if you forgo the medical exam. Having a serious health condition doesn’t automatically disqualify you. Some companies offer coverage even if you have cancer. You can also get life insurance if you have HIV, though only a few companies offer this type of coverage, and it tends to be more difficult to obtain. 

A few alternatives are available if you don’t want to take a medical exam. A simplified issue policy, also called a no-exam policy, waives this requirement. You still have to fill out a health questionnaire, answering questions about tobacco use and medical diagnoses. You can bypass both the medical exam and the health questionnaire with guaranteed-issue life insurance. 

The downsides to opting for a no-exam policy are that the premiums tend to be much higher, and you typically can’t get as much coverage as with a fully underwritten policy. Learn more about Life Insurance with No Exam in our comprehensive guide.

What Riders Are Offered With Whole Life Insurance Policies?

Riders are like sides to your entrée: after you order the main course, you can pick and choose which extras you want. The prices vary, though you can always plan on paying extra to add a rider. Availability also differs from one company to the next. We explain the most common riders below. 

  • Accelerated benefit, accelerated death benefit: This lets you take early withdrawals of the death benefit early if you are diagnosed with a serious health issue. Most companies distinguish between terminal illness, chronic illness, critical illness, and disability, offering different riders in each category. The types of medical conditions that are eligible for early withdrawals are typically spelled out in the fine print.
  • Accidental death rider: This pays an additional benefit when the cause of death is an accident. Examples of accidental death include poisoning, car accidents, and falls. With accidental death and dismemberment (AD&D), the insurance company will also pay a small benefit if the insured loses a limb, becomes paralyzed, or loses vision or hearing.
  • Child rider: A rider that pays a benefit if a dependent of the policyholder passes away. This benefit is helpful to cover medical costs and burial expenses.
  • Disability rider: This rider waives part or all of the life insurance premium if you become permanently disabled. To qualify for a payout, the insurance company usually requires a waiting period of a few months to verify that the disability is permanent.
  • Estate protection rider: For survivorship policies that cover you and your spouse, an estate protection rider increases the death benefit if both parties pass away in the first few years of the policy. This provides additional funds to cover any estate taxes your beneficiaries may need to pay. 
  • Guaranteed insurability rider: A guaranteed insurability rider ensures that you will be able to increase your coverage level later on without an updated medical exam. This is helpful if you can only afford a lower coverage level when you get the policy and want the option to increase the death benefit later in life without concerns over possible future health problems.
  • Guaranteed policy split rider: This is available on some survivorship policies. It certifies that you will be able to split the policy at a later date and still have coverage for you and your spouse. Common reasons for splitting a policy include changes to estate laws and divorce.
  • Spousal rider: A spousal rider or other insured rider is similar to a child rider, paying the policyholder a benefit if the named individual passes away. This can be beneficial if you have a spouse that isn’t employed. The death benefit can be used to pay for additional child care or other household services, in addition to covering funeral costs.

What Is Permanent Life Insurance?

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A permanent life insurance policy is intended to be in place for the rest of your life. It is a guarantee that your beneficiaries will receive money after your death (as long as the premiums have been paid according to the terms). In contrast, term life insurance only covers you for a predetermined number of years. If you outlive this term, your beneficiaries can’t claim any life insurance after your death. 

There are four main types of permanent life insurance: whole life, universal life, variable life, and variable universal life. In 2019, about 44% of all life insurance policies issued fall into one of these categories, according to the American Council of Life Insurers. 

All types of permanent life policies have premiums that the policy owner pays, death benefits that the beneficiaries receive after your death, and cash value. The cash value is separate from the death benefit and is usually not paid to beneficiaries after your death. The main purpose of the cash value is to supplement your payments. It can keep your premiums from increasing at a later date, or it may cover costs for the life insurance company if you have already finished paying all of your premiums. 

Universal life differs from whole life in that the insured has more flexibility to change the coverage level, the payment arrangement or the premium amount at a later date. A variable life policy offers different investment options for the cash value. These may include an index fund, such as the S&P 500, or a mutual fund. A variable life policy can be based on a whole life or a universal life policy. 

Whole vs. Term Life Insurance

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The length of coverage is one of the biggest differences between whole life and term life. Whole life covers you for the rest of your life, while term life covers you for a set number of years. Both pay a death benefit to your beneficiaries after you die if the policy is still active.

Another major difference between the two is cost. A whole life policy is significantly more expensive than a term life policy. Because you keep a whole life insurance policy in place for the duration of your lifetime, it’s guaranteed that the insurance company will pay a claim to your beneficiaries. Typically, only a lapse in premium payments or fraud will result in a denial of a whole life insurance claim. 

With term life, coverage lengths span a set number of years. Common term periods are 10, 15, 20 and 30 years. If you are alive at the end of your term, the coverage ends and no death benefits will be granted. There is typically no refund of premium payments unless you have a return-of-premium rider. Some companies offer the option to convert a term life policy into a permanent policy. 

Out of the two, only whole life policies have a cash value component. A small portion of your premium funds the cash value, and it slowly grows over the years. It isn’t an asset that you own free and clear, and it doesn’t get paid to your beneficiaries after your death. The cash value is a tool that the life insurance company uses to help pay your premiums as you age. If you decide to cancel the policy, known as surrendering, you may receive a portion of the cash value back. 

For most households, term life insurance is a better option than whole life.. Its lower premiums allow you to get a much higher level of coverage, while still providing the protection your family needs before retirement. 

Is Whole Life Insurance Worth It?

For most individuals, whole life insurance is not worth it. It’s expensive, builds wealth more slowly than other investment tools and often isn’t necessary after you retire.

Monthly premiums for a whole life policy cost significantly more than other life insurance policies. A comparison of sample rates for $1 million in coverage highlights this gap. This example is for a 30-year old male that is not a tobacco user and is in the Standard Plus risk category. A 10-year term life policy has a sample rate of $43.69 per month. Premiums for a whole life policy are more than 19 times higher, at $838.66 a month. 

Because its premiums are so much more expensive, the risk of choosing a whole life policy over other types of life insurance is that you’ll select a lower coverage amount to make the policy more affordable. Settling for less coverage may leave your beneficiaries without enough money after your death. 

The cash value component makes it appear as though you are building wealth, but this is misleading. After your death, the money is usually kept by the insurance company and not paid to your beneficiaries. Some policies let you borrow a portion of your cash value if you have accumulated enough in your account. However, you are essentially borrowing money from yourself and paying fees and interest to do so. The cash value growth is tax-deferred, but the fixed interest rates tend to be lower than you’ll find with other types of investments. 

Insurance agents sometimes try to persuade you to buy whole life because they make more commission on the sale, not necessarily because it’s the best policy for your needs. Commission rates differ from one company to the next, are dependent on the type of policy, and are often tied to the cost of the policy. However, in general, an insurance agent will earn more by selling a whole life policy instead of a term life policy. 

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