Is a Whole Life Insurance Policy Right for You?

Over 40% of Americans don’t have whole life insurance of any kind and a large percentage of those who do have coverage only have a small term life policy through their employer.

Medical science has come a long way but we haven’t yet discovered the secret to immortality. Everyone will die sooner or later and many will leave behind spouses, children, or other financial dependents.

Whole life insurance is a time-tested way to provide for expenses ranging from burial costs to ongoing income for your family.

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What is whole life insurance?

Whole life insurance is a type of permanent life insurance that’s designed to provide coverage for your entire lifetime as opposed to providing coverage for a limited duration.

Whole life insurance can build cash value over time, which makes the policy more than a simple insurance contract.

As an asset, the policy can be borrowed against and, in some cases, the cash value of the policy can even pay premiums to keep the policy in force.

There are several types of permanent life insurance, including whole life insurance, universal life insurance, variable life insurance, and variable-universal life insurance.

Each type of permanent life insurance has its pros and cons, but they all have one commonality: they are designed to provide coverage for your entire lifetime.

By contrast, term life insurance policies — which are the most common type of life insurance — only offer coverage for a limited time, like 10, 20, or 30 years.

Of the various types of permanent life insurance, whole life is the most common and is generally regarded as being the safest type of permanent life insurance for the consumer.

As its core function, life insurance is income replacement; it’s a way to plan for ongoing expenses after the death of an income producer or of someone who contributes monetary value even if there is no income, as in the case of a homemaker.

However, a whole life insurance policy can offer several benefits even while alive, such as access to loans and living benefits.

Types of whole life insurance policies

As a technical matter, there are numerous variations in policy types and policy endorsements that can change the way your policy performs as well as its features.

Here are some of the most common distinctions and how they can affect your coverage.

  • Traditional whole life insurance. With a traditional whole life insurance policy, your premiums pay for the cost of insurance while a portion of your premiums fund a built-in savings feature that earns interest and builds cash value over time. While traditional whole life insurance can act as a long-term investment, expect a low rate of return when compared to many other investment options.
  • Participating whole life insurance. A participating whole life insurance policy refers to a policy offered through a mutual insurance company. In a mutual life insurance company, the policyholders are also the owners of the company and can earn dividends based on the company’s profits. This contrasts with stock-held companies in which shareholders own the company and dividends aren’t earned by policyholders.
  • PUA rider. A Paid-up Additions rider allows the policy to increase the death benefit and see faster growth in cash value. A rider is just an add-on to the policy. Paid-up additions can be funded through dividends or through additional premiums. One attractive benefit to the rider is that it allows an increased death benefit without additional medical tests or related insurability questions.
  • Single premium whole life insurance. One of the concerns many have about life insurance of any type is the cost of ongoing premiums. Single premium whole life insurance allows you to pay a lump sum for coverage.
  • 10 Pay and 20 Pay. With a similar goal to single premium whole life insurance, 10 pay and 20 pay shorten the length of time that you need to pay premiums to 10 years or 20 years respectively.
  • Paid up at 65. For many households, income slows at age 65 as we shift into retirement. To meet the cash-flow realities of retirement income, a paid-up at 65 policy condenses the premium payments into your prime earning years and by age 65, no more premiums are required.
  • Final expense insurance. Targeted at seniors and those over age 50, final expense insurance is a type of whole life insurance with simplified underwriting and lower coverage limits. Death benefits for final expense insurance are typically capped between $10,000 to $50,000. Common uses for this coverage include preparing for burial costs and residual medical bills.

How does whole life insurance work?

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A whole life insurance policy provides a fixed amount of coverage, called a death benefit, for your entire lifetime — as long as the premiums are paid to keep the policy in force.

Whole life insurance is sometimes referred to as cash value life insurance, which gives some insight into another feature of the policy: a whole life insurance policy builds cash value, which comes from an interest-bearing savings account.

Many policies also earn dividends, which can add to the cash value of the policy.

Like other types of insurance, whole life insurance rates are based on risk, with general health and a number of other factors being weighed to determine the cost of the policy.

The amount you pay for the policy is called a premium and with a whole life insurance policy, your premium is used for both to cover the cost of insurance and to fund a savings account.

This gives a whole life insurance policy an investment element as well — but one that is protected from the ups and downs of the stock market.

Cash value

The cash value of your whole life insurance policy represents the accumulated savings in your policy.

Your premiums pay to provide life insurance coverage but also fund a savings account that earns interest.

Some people use the accumulated cash value in the policy to continue making premium payments.

The cash value of the policy —  based on interest compounding — is designed to equal the death benefit amount at the policy’s maturity date, which is discussed in more detail later.

One common use for the cash value in a whole life insurance policy is loans. When you borrow against your life insurance policy, you are using your policy as collateral.

If the loan isn’t paid back, the amount of the outstanding loan is subtracted from the death benefit.

This feature provides flexibility to access the value in your policy as needed.

Policies can also be surrendered for cash value, which results in a payout of the policy’s accumulated investment value and and an end to life insurance coverage for the policy.

Expect fees or rules to affect the amount of money available. It’s important to note that, in most cases, the cash value of the policy does not increase the death benefit.

Some policies offer the option of using cash value to increase the death benefit, but expect to pay more for coverage in this case.

Dividends

Many life insurance policies also earn dividends. In a mutual company, the company is owned by the policyholders.

If the mutual insurance company makes more money than it needs to fund its reserves, a portion of the profit may be paid to the owners, which are the policyholders.

Dividends paid are usually tax-free because they are classified as a return of premiums.

In effect, the company charged a bit more than they needed to charge and then returned the money as a dividend.

Dividends aren’t guaranteed because they are based on the actual financial performance of the company in a given year.

Factors that affect rates and insurability

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If you took a group of 10 people at random, most in the group would probably pay a different amount for whole life insurance coverage than the others in the group — even if they are the same age.

A number of factors come into play that can affect rates and the combination of these factors make rates more closely reflect individual insurance needs and individual risk.

  • Coverage amount: Buying $10,000 in coverage will cost considerably less than buying $100,000 in coverage.
  • Health: In many ways, your life insurance rates reflect the risk that the insurer has of paying out early. Understandably, your overall health plays a big role in longevity and health concerns like being overweight or high cholesterol can play a role in rates.
  • Tobacco use: Expect higher rates if you use tobacco or nicotine products.
  • Drug and alcohol use: Use of drugs or abuse of alcohol can affect your ability to get insurance and limit your options.
  • Family health history: Your own health history is the insurer’s primary interest, but your family’s health history can lead an insurer to investigate a bit further. For example, if there’s a history of cancer in your family, there may be a genetic risk.
  • Age: Time catches up with all of us and age can be a big factor in rates or insurability. Although the maximum age varies by policy or by insurer, expect to find fewer options available as you get past age 50. Also, expect rates for a new policy to increase as you get older as well.
  • Gender: Life insurance costs are based on life expectancy. Women tend to live longer and as a result, rates for women are usually lower if all other rating factors are equal.
  • Credit: Your credit history is often a factor in many types of insurance.
  • Driving history: Your driving history can help insurers understand risk and can affect your rates.
  • Criminal records: Misdemeanors aren’t a factor, but felony convictions can affect rates, policy choices, or your ability to purchase whole life insurance coverage.
  • Job: What you do for a living can introduce risks that can affect rates. For example, a roofer has more risk of death or permanent injury on the job than an office worker.
  • Hobbies: How you spend your free time can affect rates and eligibility as well. Hobbies like skydiving, scuba diving, rock climbing, or motorcycle riding can increase the cost of coverage and may limit the number of insurers willing to write coverage.

Classifications

Names for each group can vary by insurer but insurers use tiers, called classifications, to group applicants according to overall health. Here are some of the classifications you might find, although different names may be used.

  • Super-preferred
  • Preferred
  • Select
  • Standard
  • Rated

Expect the lowest rates for higher tiers and higher rates for lower tiers. Rated applicants may fall into one of several tiers below standard.

For example, if you are in average health but have had a recent heart attack, your policy may be rated and you can expect to pay a bit more to reflect the increased risk.

In almost all cases, expect the life insurance application process to require a medical exam.

No-exam policies may be available but tend to offer lower death benefits and higher premiums per dollar of coverage.

Insurable interest

You can’t buy life insurance on your neighbor or a friend because there’s no risk of financial loss to you. Insurable interest is an important concept in insurance and refers to your potential financial loss.

You also can’t buy more insurance than your potential loss. This can limit the amount of coverage you can buy.

For example, if you’re age 50 and earn $10 per hour working 40 hours per week, you won’t be able to buy a $1 million insurance policy.

The amount of coverage exceeds the amount you can earn in your remaining working years.

When you apply for life insurance, insurers are calculating insurable interest and determining the maximum amount of coverage you can buy.

Premiums

The premium is the amount you pay annually for a whole life insurance policy, although many people pay monthly.

Premiums for whole life insurance policies are fixed, meaning they won’t change as you get older or if your health changes as long as the policy is still in force.

In most types of insurance, it’s the premium payment that binds coverage. Until and unless the premium is paid, there is no coverage.

Fixed premiums for a whole life insurance policy are based on averages, which means premiums may seem high when you are young but will be lower, compared to the risk, as you get older.

Essentially, the entire cost of insurance for a lifetime is calculated and then divided by the number of years the insurer expects you to pay premiums. This is true of fixed-rate term life policies as well.

Other life insurance types, like universal life insurance, utilize an annually renewable term life insurance policy that can become pricey in later years, making whole life insurance a better choice if you need a predictable premium cost.

Maturity date

A whole life insurance policy comes with a maturity date. The policy either matures at death or at a certain age, usually age 100.

This means that on the policy anniversary date nearest the maturity age, the cash value of the policy is paid to the insured and the coverage ends.

If you live to maturity age, you may need to make arrangements to ensure your intended beneficiaries are provided for because your policy is no longer in force.

Accelerated benefits

Many whole life insurance policies provide access to a portion of the policy’s face value if you become terminally ill. This can help cover the cost of medical expenses, long term care, or other costs that result from the illness.

Example of how whole life insurance works

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The cost of coverage can vary depending on a number of factors. Let’s consider some examples using some people of average height, weight, and health.

For a male age 29 who is 5’9” and 195 pounds, a $150,000 whole life insurance policy might start at about $141 per month.

If that same person was a smoker, rates jump dramatically and the same coverage can cost $182 per month or more.

Coverage costs are affected by age as well. Add 10 years to the age and rates climb from $141 per month to $209 or more for a 39-year-old male.

Now let’s make our 29-year-old non-smoking male a female instead. Rates fall to as low as $125 per month for $150,000 in coverage.

On average, women live longer, which is reflected in life insurance rates. Where exclusions to coverage were once commonplace, most causes of death are now covered and exclusions are more narrowly focused.

In all of the examples above, the policy would pay a $150,000 death benefit to the policy’s beneficiaries.

In most cases, the death benefit is not taxable but there are cases where the life insurance proceeds can increase the value of the deceased’s estate and can increase estate taxes.

In addition to providing a death benefit, the $150,000 policy also builds cash value over time. Early years in the policy may have smaller cash values but further into the policy expect compounding to grow cash value more rapidly.

Whole life insurance pros and cons

Like all financial products, whole life insurance has its pros and cons and may not be a fit for everyone.

Pros

  • Better loan structure: A whole life insurance loan uses your policy’s cash value as collateral. By contrast, other types of permanent life insurance reduce your cash value by the amount of the loan.
  • Dividends: If you purchase coverage through a mutual insurance company, you’ll often get a share of company profits as a dividend, which helps build cash value.
  • Dividends not taxable: When you are paid dividends, they are classified as a return of premiums and therefore are not taxable.
  • Coverage doesn’t expire: Unlike term policies, your coverage lasts for your entire lifetime as long as the premiums are paid.
  • Death benefits not taxable: In most cases, death benefits aren’t taxable to your beneficiaries.
  • Level premiums: Whole life insurance policies use guaranteed level premiums; your premiums won’t increase as you get older.

Cons

  • Higher premiums than term: Whole life insurance can have premiums more than 10 times higher than term life insurance.
  • Cancellation fees: If you need to cash out your policy, fees can take a big bite out of your policy’s cash value.
  • Bundled fees: Whole life insurance policies do have fees for management, etc., but policies typically don’t disclose fees in detail.
  • Loan rates: Interest rates on loans that use your cash value as collateral are often higher than the rate of return on the cash value in your policy. There may be less expensive ways to borrow, depending on your needs.

Whole life insurance vs. term insurance

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Term and whole life insurance are the two most common types of life policies. Here’s what to consider.

Term life insurance

The 20-year term life insurance policy is the most commonly sold life insurance policy. Even more common are group life insurance policies provided through an employer.

While both options provide relatively inexpensive coverage, both solutions are temporary.

Less than 2% of term life insurance policies pay a death benefit. Viewed another way, there’s a 98% chance of losing all the premiums you pay with a standard term life insurance policy.

In the case of employer-sponsored group life insurance, the coverage amount is usually not enough for most households and if your employer paid the premiums, the death benefit may be taxable, which reduces coverage further.

Term life insurance has lower premiums than permanent insurance options and can be a valuable tool to help cover financial obligations that only exist for a limited time period, like a mortgage or the cost of raising a family.

Whole life insurance

Whole life insurance often has a similar goal of providing income to your beneficiaries after you’re gone. However, a whole life insurance policy doesn’t expire.

Additionally, the cash value aspect of a whole life insurance policy can provide financial flexibility or  — with the right structure and riders — create a tax-advantaged investment vehicle with both guaranteed growth and growth through dividends.

Whole life insurance also costs more than term life insurance, but the cost may be justified because your coverage comes with guarantees, some of which are not available with a term life policy or with other types of permanent life insurance.

Whole life insurance guarantees

  • Premium guarantee: The cost of coverage won’t change once your policy is in force — and your coverage won’t expire.
  • Death benefit guarantee: Unless you stop paying premiums or convert your policy to extended term, the death benefit is guaranteed — less any outstanding loan balances.
  • Cash value guarantee: Interest rates are often guaranteed which helps your policy to build cash value.

Which life insurance solution is best for you depends on your unique situation.

Generalizations that suggest one type of life insurance over another can provide less-than-perfect guidance in many cases, so a conversation with a trusted agent to learn your options is recommended.

One caution that applies to many households, however, is that a term life insurance policy offered through an employer often doesn’t provide enough financial coverage and may be at risk if you lose your job or change jobs.

A policy you own is a policy you can control — and ownership gives you the opportunity to select the best coverage for your family’s long-term needs.

How much does whole life insurance cost?

Rates for whole life insurance can vary dramatically from one person to the next because premiums are based on individual risk as well as the amount of insurance required.

Age is a big factor and you can expect rates to increase with each passing birthday if you haven’t yet secured coverage. Here is an example of rates for a non-smoking male of average height and weight in average health.

Coverage is for whole life insurance with a $150,000 death benefit.

AgeMonthly Premium
19$106
29$141
39$209
49$333

Life insurance rates are individualized and can be affected by a number of statistically-significant factors, so the rates above are best viewed as an illustration of how rates can change with age.

Q&A about whole life insurance:

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Do whole life insurance policies earn interest?

Whole life insurance policies feature a savings element that earns interest and builds cash value in the policy. The interest rate can vary by policy or by insurer but many policies earn about 2% based on cash value balances.

How long does it take for whole life insurance to build cash value?

Expect cash value to build slowly, particularly in the early years of the policy. Most policies are designed in a way that the cash value matches the death benefit at age 100. Some insurers offer riders that can help accelerate cash value growth and increase the amount available as a death benefit.

Are whole life insurance premiums tax-deductible?

For most consumers, life insurance premiums aren’t tax deductible. In some business-related scenarios, life insurance premiums may be deductible as a business expense. However, in this case, the death benefit may become taxable to the beneficiary.

What happens to cash value in a whole life policy at death?

In most cases, the cash value of a whole life insurance policy is absorbed by the insurer at death. However, if your policy has a rider that pays both the face value and the cash value to the beneficiary, the death benefit is increased by the cash value.

What happens if you stop paying whole life insurance premiums?

If you stop paying premiums for your whole life policy, the policy can lapse, ending coverage. You may have some options, however. If you have cash value in the policy, you may be able to cash out the policy — but you won’t have coverage anymore.

You might also be able to structure the policy with a reduced death benefit by using cash value to pay premiums or convert the policy to an extended term policy. Reach out to your insurer or agent to understand your options if you can’t afford to make payments.

What happens if I outlive my whole life insurance policy?

Most whole life insurance policies have a maturity date at age 100. When the policy reaches maturity based on your age, the cash value of the policy is paid to you — and could be taxable.

In most cases, the cash value is equal to the death benefit of the policy, but any outstanding loan balances will be subtracted from the payout.

Some policies offer a maturity extension rider that extends maturity until death, which keeps the intended function of the policy and avoids the possibility of income tax liability.

Can you cancel whole life insurance?

A whole life insurance policy can be cancelled but the costs associated with cancelling the policy can vary depending on how long you’ve had the policy.

Surrender fees can take a big bite out of cash value in the first years of policy ownership — and in some cases, cash value is forfeited if your cancel the policy within the earlier years of coverage.

Can you change whole life insurance to term?

If your policy provides the provision, you may be able to convert your whole life insurance policy to and extended term option. The length of coverage depends on how much cash value you’ve accumulated.

In effect, the cash value is used to pay premiums on the life insurance policy — until the cash value is gone. Discuss your options with your agent to learn about other strategies that may fit your needs.

Protect your family with a whole life insurance policy

We buy auto insurance and home insurance — even though many of us will never have a claim.

Sooner or later, we all have a need for life insurance, however, whether to provide income for others or as a way to protect wealth passed to others.

Buying life insurance coverage earlier in life can be much more affordable than waiting until later in life. With each passing birthday, the cost of purchasing insurance increases.

If you are considering coverage to protect your family, waiting can be costly and may even make coverage unaffordable.

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