Understanding Whole Life Insurance
Whole life insurance offers a permanent form of coverage designed to last your entire life, provided you keep paying your premiums. Unlike term life insurance, which covers you for a set period, whole life policies are designed for long-term needs. This is also a more expensive form of insurance.
Deciding if whole life insurance suits your needs involves understanding its features and comparing it to other options. Let’s explore how whole life insurance works and who might benefit from it.
Key Features of Whole Life Insurance
Whole life insurance has three main components:
- Lifelong Coverage: As long as you pay your premiums, the policy remains in effect for your entire life. Keep in mind that the policy may end at age 100, and any outstanding loans at the time of death may reduce the payout.
- Level Premiums: Your premium payments stay the same throughout the life of the policy, providing predictable costs.
- Cash Value Component: A portion of your premium goes into a cash value account, which grows over time. This cash value accrues interest and acts like a savings component within the policy.
How the Cash Value Works
The cash value within a whole life insurance policy grows at a fixed rate set by the insurer, typically between 1% and 3.5%, according to Quotacy, a brokerage firm. This guaranteed growth, makes whole life insurance different than other policies that don’t do the same. Once your cash value has grown, you can take out policy loans.
When you pass away, your beneficiaries usually receive a death benefit that’s income-tax-free.
Dividends and Mutual Life Insurers
If you have a policy with a mutual life insurer, which is owned by policyholders, you might be eligible for annual dividends based on the company’s financial performance. You have the option to take those dividends in cash, use them to lower your payment, repay any cash value loans or to purchase more coverage. Dividends are usually not taxed.However, if you leave them in your policy and the interest is not taxable, you may be taxed on the earnings from them.
Cost of Whole Life Insurance
Whole life insurance is generally more expensive than term life insurance because it’s designed to last your entire life and includes a cash value component. Commission fees you paid if you got the policy from a life insurance agent might also be included in the total cost.
For example, a healthy, non-smoking 40-year-old man looking for a $500,000 policy would spend about $7,440 annually on whole life insurance, in comparison to $334 for a 20-year term life policy. For a woman the same age, a whole life policy may cost around $6,512 annually, compared to $282 for term life insurance. Rates increase for smokers.
Annual Whole Life Insurance Rates (Nonsmokers)
*Source: Covr Financial Technologies. Lowest three rates for each age averaged. Data valid as of February 27, 2025.
Annual Whole Life Insurance Rates (Smokers)
*Source: Covr Financial Technologies. Lowest three rates for each age averaged. Data valid as of February 27, 2025.
Is Whole Life Insurance Right for You?
Whole life insurance might be a good choice if:
- You can afford the higher premiums.
- You’ve maximized retirement accounts like a 401(k) and/or IRA.
- You consider life insurance as a cash asset.
- You want a policy where you get guaranteed returns.
- You have a lifelong dependent, like a child with special needs.
- You’re wealthy and want to help your heirs pay estate taxes.
How to Choose the Right Whole Life Policy
Whole life insurance involves a long-term financial commitment, so do some homework before you buy.
- Choose the Right Coverage Amount: Decide how much life insurance you need. A small policy might be useful for funeral expenses. More money may be needed to do more.
- Examine Riders: Riders are supplementary coverage features that you can add to your life insurance policy at an added cost. These include an accelerated death benefit rider and a waiver of premium rider. Make sure a policy contains the riders that would be useful for you before you commit.
- Look at the Rate of Return: A part of your premium goes into the cash value of whole life insurance, which usually increases slowly. You can borrow against the funds or surrender the policy for the cash value. Keeping a loan unpaid could lead to a reduction in the death benefit.
- Be Aware of Surrender Charges: Whole life insurance policies frequently have surrender charges for the first 10-15 years. If you cancel your coverage early, you will have to pay a fee that is a percentage of your cash value. The surrender charge declines each year until it stops applying.
- Understand Approval Processes:
- Fully Underwritten: This involves a detailed form and medical examination.
- Simplified Issue: You answer some health questions, but there’s no exam.
- Guaranteed Issue: Acceptance is guaranteed without a medical exam or health questions. Premiums are expensive, and these policies may not offer full death benefits.
- Compare Whole Life Insurance Quotes: Compare the same level of coverage from different insurers to get the best price.
- Check the Insurer’s Financial Strength: Find out the financial strength rating of each whole life insurer through rating firms, such as AM Best. A solid company is more likely to pay claims in the coming decades. AM Best suggests companies with B+ ratings or higher have a good ability to meet their obligations. NerdWallet recommends insurers with ratings of A- or higher.
- Research the Insurer’s Reputation: Check the National Association of Insurance Commissioners website for complaint indexes.
Alternatives to Whole Life Insurance
Term life insurance is sufficient for many families. Term life policies don’t have cash value and expire after the term is over, but their premiums are much lower.
Another option is universal life insurance. These policies often last a lifetime and offer some benefit payments. You also get some flexibility to adjust your premiums and death benefit amount.
Frequently Asked Questions
- What is whole life insurance? It’s a permanent life insurance type that usually lasts for your entire life. It contains a cash value element that grows over time. After enough value is earned, you can use the funds by taking out a loan or making other payments.
- What is the difference between term and whole life insurance? Term life insurance expires after a set number of years, usually 10, 20, or 30, and does not provide any cash value. Term life insurance is often much cheaper than whole life insurance.
- How much does whole life insurance cost? A $500,000 whole life insurance policy costs around $4,940 annually for a healthy 30-year-old man, according to Covr Financial Technologies. Whole life rates are affected by your age, health, lifestyle, and smoking status.
