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Whole Life Insurance: Defined And Explained

Andrew Dehan4-minute read
February 03, 2022

Life insurance is one of those things you want to have before you need it. But it’s also a topic that’s hard to talk about, especially since it involves the death of loved ones or yourself.

Whole life insurance is one of the most common life insurance types. In this article we’ll define whole life insurance, its cost, how it differs from term life insurance and list its pros and cons.

What Is Whole Life Insurance?

Whole life insurance is a permanent life insurance policy option that ensures a death benefit for beneficiaries, as well as a tax-deferred cash value.

Whole life insurance lasts for the duration of the policyholder’s life. It’s the most traditional life insurance policy, paying out a death benefit when the policyholder dies. Not only does whole life insurance pay out this benefit, but it also includes the ability to build cash value over the length of the policy.

How Much Does Whole Life Insurance Cost?

Whole life insurance costs vary by type of permanent policy and features within that product. These features may include a growing death benefit and cash value accumulation.

Premiums for whole life insurance also vary greatly by age, gender and aspects of the insured’s health, such as whether they smoke. This means the range for monthly whole life insurance premiums is large: $200 – $1,000. Generally, men pay more than women and the price goes up as you age.

How Do Whole Life Insurance Policies Work?

Unlike other insurance policies, whole life insurance policies last for as long as the insured is alive. The policy guarantees a set benefit payout at the policyholder’s death. This amount is typically set at the onset of the policy. As long as the policyholder makes regular, monthly payments, the benefits will be paid out when they die.

Some insurers also offer riders to add on to your life insurance plan. Think of insurance riders as ordering off an a la carte menu. You can customize your life insurance to better fit your needs. A couple examples of common riders include a family income rider (the insurance company provides a set income for the family of the insured) and a long-term care rider (the insurance company pays for at-home care or stays in a nursing home).

Whole life insurance also has a cash value attributed to it. With each premium payment, the cash value of the policy grows. The cash value earns a guaranteed interest rate over the length of the policy, which helps policyholders build equity.

The Living Benefits Of Whole Life Insurance 

The cash value of a whole life insurance policy can be a major source of equity to policyholders. This cash value can function as a foundation for your finances and earns a higher interest rate than a savings account. Unlike stocks, its rate of return is guaranteed, making it safe no matter what the market does.

Policyholders can loan themselves money from the cash value through a policy loan. Since it’s considered debt, it’s not taxable. You can use this loan to fund a wide variety of needs, from emergency medical payments and college tuition to paying your mortgage. Technically, you don’t even have to pay it back, though you should eventually, because the insurance company will charge you interest on it.

Term Vs. Whole Life Insurance

When it comes to term versus whole life insurance, term life insurance is another popular type of life insurance. The policy is held for a specific length of time – or a term – typically for 20 or 30 years. The policy only pays out if the insured dies during that term. Unlike whole life insurance, no cash value is built by term life insurance.

Whole life insurance differs largely because the policy only ends when the insured passes or the policy stops being paid. Due to this cash value and the ongoing policy length, they can cost multiple times more than a term life policy with the same death benefit.

The Pros And Cons Of Whole Life Insurance

Whole life insurance provides benefits for policyholders, but it also has drawbacks to consider. Whether a whole life insurance policy is right for you depends on your income, your age and the type of estate you want to leave for your family. When considering life insurance, weigh your financial priorities and budget.

Pros Of Whole Life Insurance 

  • It covers the entire span of your life: Unlike term life insurance, whole life insurance won’t end at a set date. It covers you for your whole life, as long as you pay it.
  • Cash value has a guaranteed rate of return: Money invested in the stock market doesn’t guarantee returns. Money in a whole life insurance policy does. It’s safe from market changes.
  • Policy accrues interest through the cash value component: Your whole life insurance cash value will grow as you pay the premiums, building with interest.

Cons Of Whole Life Insurance 

  • More expensive than term life insurance: Whole life insurance premiums can range from 5 – 15 times more than a term life policy that has the same death benefit.
  • Expensive fees for withdrawing from cash value fund: If you want to pull cash out, you may have to pay penalties. Any policy loan you take will be charged interest.
  • Policy loans will decrease your death benefit: If you take out a policy loan on your cash value, your death benefit will go down the same amount. If you don’t pay the loan back before you die, your beneficiaries will get less money.

Is Whole Life Insurance Right For You?

Since term life insurance is cheaper and easier to manage, whole life insurance is recommended for high-income policyholders looking to secure and pass on their estate. Since whole life insurance policies have a guaranteed cash value, they’re a conservative way to save money and build significant equity.

There are other options, of course. Term life insurance, with its significantly cheaper premiums, may be a better choice for most people. Other cash could be invested in a diverse securities portfolio to hedge against market changes.

Before deciding what life insurance policy is for you, consult with an insurance agent or broker.

The Bottom Line

Whole life insurance covers you for your whole life, unlike term life insurance, which only covers you for a set period of time. By paying premiums, you can ensure that your beneficiaries will receive a death benefit when you die.

These premiums also add to the cash value of the policy, which will grow at a guaranteed interest rate throughout the length of the policy. This cash value can be borrowed from.

If you’re in the market for life insurance, read our guide on shopping for life insurance. Need some help on filing a claim? Check out our guide on filing a life insurance claim.

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Andrew Dehan

Andrew Dehan is a professional writer who writes about real estate and homeownership. He is also a published poet, musician and nature-lover. He lives in metro Detroit with his wife, daughter and dogs.