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What is whole life insurance?

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Whole life insurance is a type of permanent life insurance. That means you’re covered your entire life as long as you keep up with your premium payments. Plus, a whole life insurance policy can offer you flexibility to help keep you covered while also growing your savings. Here’s how it works.

Life insurance has numerous myths and assumptions surrounding it, but it’s easier to understand when you break down each type individually. With whole life insurance, you get permanent coverage, with part of your premiums going into a savings account that accrues cash value over time. Some policies even pay annual dividends.

Your premium is usually pre-determined, as is the death benefit — which is unaffected by your age at the time of death. This means your beneficiary receives the entire benefit in a lump sum.

However, you must be sure to keep up with your premium throughout the entire policy. If you let your policy lapse at any time, you may lose coverage. Since you’re likely older than when you first took out your policy, it could be very expensive to find a whole life insurance policy with the same premium.

How whole life insurance works

There are three primary types of whole life insurance. While each one offers a permanent policy, the structure of the cash value benefit varies.

Traditional whole life: With a traditional whole life policy, you’re guaranteed the same premium and death benefit for the duration of your policy. Whole life insurance is not as cheap as some alternative life insurance policies earlier in life but as you age, it becomes the more affordable option. You can also opt to pay more than your minimum premium amount, with the extra funds going into a savings account. You get that money back if you decide to get rid of the policy, or you may be able to make withdrawals or borrow from the account as needed throughout your lifetime.

Universal life: Another type of whole life insurance policy is universal life. You can still choose to add money into a savings account in addition to your premium, but you earn interest on your balance, allowing your savings to grow. Later, you can opt for a lower premium and use the funds in your universal life account to cover some or all of those payments.

Variable universal life: Rather than earning a market interest rate like you would with a standard universal policy, a variable universal life policy allows you to invest your savings. You may be able to put your money into stocks, bonds, or a money market account. While there’s the potential for greater growth, your savings also has the potential for greater decline. You may then need to either adjust your premium payment or the value of your death benefit depending on how your policy’s cash value fares.

How does the cash value part of whole life insurance work?

Your cash value grows as you make more premium payments. However, as we’ve seen with the three different types of whole life insurance, how much it grows depends on the type of policy and whether or not you choose to invest that money.

You may also be able to make withdrawals or borrow money from your account. If you rely on that cash value to go towards your premium payments, you’ll need to start paying on the policy if the account drops too low. Also check to make sure your death benefit isn’t impacted by tapping into your funds.

How much does a whole life insurance policy cost?

The cost of whole life insurance depends on a few different factors; the first is your age. The older you are, the more that is reflected in the cost of your premium. Insurers also look at your health. Some require a physical exam, although that is not a universal requirement. Finally, the cost will vary depending on the size of the death benefit. A $500,000 payout will cost much less than a $1 million payout. Think about your beneficiary and what finances you want the policy to cover in the event you pass away in order to estimate how much of a payout you need.

Pros and cons of whole life insurance

Whole life insurance comes with both advantages and disadvantages. Consider both as you determine the best type of policy for your unique situation.

Advantages of whole life insurance

Permanent coverage

Premiums are consistent throughout the duration of your life, provided coverage does not lapse at any time. By getting a whole life insurance policy early then, you’ll have affordable coverage for beneficiaries, even if you live to a ripe old age.

Cash value offers flexibility

A whole life policy essentially gives you a built-in savings mechanism. It can be a part of your long-term financial planning since you have the opportunity to personally use the cash value in different ways throughout your life.

Fixed death benefit

Unless you’re unable to meet your premium, whole life insurance typically comes with a fixed death benefit. You get to choose the amount when you first open the policy and your premium payment reflects the value of the benefit.

Disadvantages of whole life insurance

More expensive premiums

Because whole life insurance is permanent, premiums are more expensive up front compared to options like term life insurance.

High administrative costs

The cash value component of your policy can involve hefty administrative fees, especially if you plan to invest. 

May not save as much as with other vehicles

A whole life insurance policy with a cash value may not be the most effective way to invest your money. You may get better rates at other financial institutions, which allow you to have more liquidity with your funds.

Which is better: term or whole life insurance?

Whole life insurance is ideal for someone who wants life-long insurance coverage. Term life insurance is typically cheaper, but your beneficiary only receives a death benefit if you pass away during the policy. When the policy expires, you don’t receive any cash value either, regardless of how long you’ve made premium payments. 

FeaturesTermWhole
Accumulates cash valueNoYes
Annual dividendsNoYes
Guaranteed payout amountYesYes
Lifelong coverageNoYes
Premium costLowHigh
Stable premiumYesYes

How to buy a whole life insurance policy

If considering purchasing a whole life insurance policy, expect the process to include the following steps:

  • Determine how much coverage you want as a death benefit.
  • Compare quotes from multiple insurance companies.
  • Compare premium and benefits as well as the structure of the cash value component.
  • Undergo a health exam if required.
  • Sign your policy paperwork and return to your insurer.
  • Begin making payments on your premium, either monthly or annually.

Some of the most used insurance companies include:

  • MetLife
  • Prudential
  • Equitable
  • New York Life Insurance Group
  • Massachusetts Mutual Life Insurance Co.

The takeaway

  • Whole life insurance provides a permanent death benefit
  • It comes with a cash value which can be handled in different types of accounts
  • Premiums are more expensive than term life, but your policy doesn’t expire

A whole life insurance policy gives you long-term security in terms of leaving your family with a solid death benefit. Just make sure that the structure of the cash value component fits into your financial planning strategy and risk tolerance (whether it’s high or low). Otherwise, you may find greater value investing your money elsewhere.

Lauren Ward

Lauren Ward is a writer for Coverage.com. She specializes in all things personal finance, including insurance, loans, and real estate.

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