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Whole life insurance is one type of permanent life insurance that can provide lifelong coverage. It provides a variety of guarantees, which can be appealing to someone who doesn’t want any guesswork after buying life insurance.
Whole life insurance combines an investment account called “cash value” and an insurance product. As long as you pay the premiums, your beneficiaries can claim the policy’s death benefit when you pass away.
Whole life insurance offers three kinds of guarantees:
- A guaranteed minimum rate of return on the cash value
- The promise that your premium payments won’t go up
- A guaranteed death benefit that won’t go down
While it can sound like a good choice, there are often better options for individuals who want insurance that will last as long as they live.
What Is Whole Life Insurance?
Whole life insurance offers coverage for the rest of your life and includes a cash value component that lets you tap into it while you’re alive.
Whole life insurance is more expensive than term life insurance because people with a whole life policy are guaranteed to have a death benefit when they die. Term life insurance, on the other hand, offers level rates for a specific period, such as 20 or 30 years. Term life policies are cheaper than whole life insurance because they offer only coverage, not cash value.
Cash value accumulation in whole life insurance
Part of the premium payments for whole life insurance will accumulate in a cash value account, which grows over time and can be accessed with a policy loan or withdrawal.
Similar to a 401(k) or IRA, the money in the cash value account grows tax-free. However, if you take out cash value that includes investment gains, through a policy withdrawal or loan, that portion will be taxable.
The accumulation of cash value is the major differentiator between whole life and term life insurance. While actual growth varies by policy, some take decades before the accumulated cash value exceeds the amount of premiums paid. This is because the entire premium does not go to the cash value—only a small portion. The rest goes to paying for the insurance itself and expense charges.
Most whole life policies have a guaranteed return rate at a low percentage, but it’s impossible to know how much your cash value will actually grow. That’s because most insurance companies that sell whole life also offer a “non-guaranteed” return rate of return based on dividends. You can choose to apply your dividends to cash value every year, but you can’t know how much that will amount to over time.
It may take decades for a policyholder’s cash value to exceed what’s paid in premiums.
Using the cash value in whole life insurance
You can tap into cash value with a withdrawal or a loan, or also by surrendering the policy. If you take a loan, it’s tax-free, and you can pay it back, with interest. There are no taxes as long as your withdrawal is less than the portion of your cash value that’s attributable to premiums you’ve paid. If your withdrawal is greater, you’ll owe taxes on the difference because those are investment gains.
Outstanding loans and withdrawals will both reduce the amount of death benefit paid out if you pass away. That’s not necessarily a bad thing. After all, one of the reasons to buy a whole life insurance policy is to get cash value, so why let the money sit there without ever using it?
You want to be sure that you know all the ramifications of accessing cash value prior to making any decisions.
Death benefit and picking beneficiaries
When you buy a policy, you’ll choose a life insurance beneficiary to receive the death benefit. You don’t have to split the payout equally among beneficiaries. You can designate the percentage for each, such as 75% to Mary and 25% to John.
It’s also a good idea to designate one or more contingent beneficiaries. These folks are like your backup plan in case all the primary beneficiaries are deceased when you pass away.
Designating beneficiaries is an important task, as is keeping your designation up to date with your wishes. The life insurance company is contractually obligated to pay the beneficiaries named on the policy, regardless of what your will says. It’s wise to check once a year to verify your beneficiaries still reflect your wishes.
What happens when you die
A major selling point of whole life insurance is that it will be in force until your death, as long as you’ve paid the required premiums.
But here’s a kicker: For most policies, the policy pays out only the death benefit, no matter how much cash value you’ve accumulated. At your death, the cash value reverts to the insurance company. And remember that outstanding loans and past withdrawals from cash value will reduce the payout to your beneficiaries.
Some policies allow you to purchase a rider that gives your beneficiaries both the death benefit and the accumulated cash value. This provision also means you’ll pay higher annual premiums, as the insurance company is on the hook for a larger payout.
How Much Does Whole Life Insurance Cost?
While some of the cash value features and the permanent nature of whole life insurance sound appealing, whole life insurance is simply unaffordable for many people.
Many life insurance shoppers look at term life vs. whole insurance costs. It’s never an apples-to-apples comparison because the policies are so different. That said, here are examples of whole life insurance quotes based on a 30-year-old male of average height and weight for $500,000 in coverage.
This cost differential makes whole life insurance far less attractive to many individuals with an insurance need.
Here is a life insurance calculator to help you determine your life insurance need.
Factors that affect whole life insurance premiums
The coverage amount you choose will help determine your rate, along with:
- Age and gender
- Height and weight
- Past and current health conditions
- The health history of your parents and siblings
- Nicotine and marijuana use, including nicotine patches and gum
- Substance abuse
- Criminal history
- Driving record (especially DUI convictions and moving violations, such as speeding tickets)
- Dangerous hobbies and activities (such as piloting planes or rock climbing)
With whole life insurance, there are a variety of other features and provisions that can affect costs as well, such as:
- Payment period: You can choose to pay for the entire policy in a short time frame, such as 10 or 20 years. The premium would rise substantially given the front loading of payments.
- Guaranteed return rate: Some companies offer a higher guaranteed return, which can result in higher annual premiums.
- Dividend crediting: Many whole life policies pay out a dividend, and policyholders can choose how to receive it. Receiving your dividend payments as a credit toward premiums reduces your annual out-of-pocket cost.
Related: Best Life Insurance Companies
Options for Surrendering Whole Life Insurance
With term life insurance, if you no longer have a need for insurance, you can simply stop paying. Once you stop, the policy lapses, and the insurance company will no longer pay any benefit if you pass away.
Whole life insurance isn’t that simple. If you stop paying, the cash value will be used to pay any premiums until the cash value runs out and the policy lapses. But there are alternatives to simply stopping payments.
Options vary depending on your plan but can include the following tactics.
Take the cash surrender value
You can simply ask for the cash surrender value to be paid to you. This is the cash value minus any surrender charge. This action ends the insurance policy, so you should only do this if you no longer have a need for insurance, or have new insurance in place.
By taking the surrender value, you’ll have to pay income taxes on any investment gains that were part of the cash value.
Ask about reduced paid-up life insurance
The life insurance company takes what you’ve already paid in, calculates how large of a death benefit that would permanently provide, and gives you a policy with the lower death benefit amount. This avoids any taxes and leaves you with some life insurance, but it may not be the full amount of coverage you need.
Extended term life insurance
The life insurance company takes what you’ve already paid in and converts the policy into a term life policy for the same death benefit. How long the policy lasts depends on how much you’ve paid, how old you are and the company’s current rates for a policy of that size and duration. This is helpful for someone who wants to preserve some life insurance for a short period of time, but no longer has a need for whole life insurance.
You can exchange your policy for a different life insurance policy or for an annuity. This can make sense to avoid taxes on the surrender value or if you realize another whole life policy has substantially better features and you’d prefer to have that policy instead.
When Does Whole Life Make Sense?
Given the expense of whole life insurance and that many people do not need insurance for their entire lives, it is often not the ideal product to purchase. However, there are some specific situations where a form of permanent life insurance makes sense.
Funding a trust: Permanent life insurance can be used to fund a trust that will support children after you die.
Paying estate taxes: For those with estates larger than the current estate tax exemption, which is $12.06 million in 2022, permanent life insurance may make sense to help heirs pay any estate taxes after you pass away. Some states have lower estate tax limits, so it may make sense for folks living in those states as well.
Funding a buy-sell agreement: If you’re an owner of a business with a partner, you might consider whole life insurance to fund the purchase of each other’s shares in the business at death.
Top Sellers of Whole Life Insurance
Below are the biggest sellers of whole life insurance, in alphabetical order. The list is based on annualized premiums for 2020, according to LIMRA, a research group for the financial services industry.
- CUNA Mutual
- Gerber Life Insurance Co.
- Guardian Life Insurance Co. of America
- MassMutual Life Insurance Co.
- Mutual of Omaha Cos.
- New York Life
- Northwestern Mutual
- OneAmerica Financial
- Penn Mutual
- State Farm Life
Is Whole Life Insurance Worth It?
Here are questions and alternatives to help you decide if whole life insurance is right for you.
- Do you need life insurance for more than 30 years?
- Do you need cash value?
- Do you want flexibility with payments or the payout amount?
- Do you need a payout when you pass away, or only after both you and a spouse pass away?
Whole life insurance is a product that has some uses, but it’s not for everybody. The additional benefits offered by whole life can often be found by using your retirement and investment accounts for gains, in combination with a term life insurance policy.
Before purchasing any insurance policy, be sure to fully understand the options available, and the policies’ various provisions.
Whole Life Insurance Alternatives
Whole life insurance is only one type of permanent life insurance. Other types of permanent life insurance work quite differently from traditional whole life insurance. Other options include:
- Universal life insurance
- Variable life insurance
- Survivorship life insurance
- Burial insurance
Life Insurance Market Share
Whole life makes up one-third of the individual life insurance market as measured by premiums paid, according to LIMRA, an industry-funded research group.
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Whole Life Insurance FAQ
How do I find cheap whole life insurance?
First, determine how much life insurance you need. For example, Forbes Advisor’s free life insurance calculator can help.
Once you have determined the life insurance amount you need, compare life insurance quotes from multiple companies. Life insurance quotes will vary widely among companies. Work with a financial advisor or experienced independent agent to identify the companies likely to offer you the best quotes.
What’s the difference between whole life insurance vs. term life insurance?
The key differences between term vs. whole life insurance is the period of level premiums and the ability to build cash value
Term life insurance is good for people who want a financial safety net for a specific number of working years, such as the years of paying off a mortgage. You lock in level premiums for term length, such as 10, 15, 20 or 30 years. A small number of companies even offer 35-year and 40-year term life insurance. There’s no cash value.
Whole life insurance is good for people who want lifelong coverage and premiums that don’t change, and cash value. Your beneficiary will get a life insurance payout no matter when you die, as long as you’ve paid the premiums needed to keep the policy in force.
What types of riders are available for whole life insurance policies?
Whole life insurance has riders that you can add to the policies, such as return of premium, waiver of premium, accidental death and long-term care. Some life insurance riders can help you benefit from a whole life policy while you’re still alive, such as a critical illness rider, which lets you take money from your own death benefit if you’re diagnosed with a critical illness.
Adding riders lets you customize a policy, but may also increase the cost.
Can a whole life insurance policy mature?
Yes, if a whole life policy reaches maturity, the policyholder receives the face amount of the policy or the amount of the death benefit and the policy ends.
A life insurance policy may reach maturity if the person reaches a certain age, such as 100 years old. The portion of the mature policy paid out is taxable, which is why insurance companies recommend extending policies past the maturity date if policyholders reach the specified age.