In this article:
- What Is a Whole Life Insurance Policy?
- How Does Whole Life Insurance Work?
- Uses of Whole Life Insurance
- Pros and Cons of Whole Life Insurance
- How to Buy Whole Life Insurance
- How Much Is Whole Life Insurance?
- Is Whole Life Insurance Worth It?
- What Is the Difference Between Term and Whole Life Insurance?
- Other Types of Permanent Life Insurance
You work hard to provide for your family, but what will happen to them after you're gone? Life insurance gives your loved ones a financial safety net after your death, and whole life insurance can do even more. Whole life insurance is a permanent life insurance policy that pays a death benefit but also builds cash value you can use while you're alive.
What Is a Whole Life Insurance Policy?
Whole life insurance is permanent life insurance that lasts your whole life (or up to age 99, depending on your policy) as long as premiums are paid. If you die with whole life insurance in force, your beneficiaries receive a payout, also known as the death benefit. Another benefit with whole life insurance is that your policy builds cash value over time you can use to cover other financial needs while you're alive.
How Does Whole Life Insurance Work?
Like other types of life insurance, whole life insurance pays a death benefit to your beneficiaries when you die. With whole life insurance, part of your premium payments also go into a savings account that grows tax-deferred at a guaranteed interest rate. Once the cash value in this account hits a certain amount, you may be able to access it several ways.
- Withdraw money from the policy's cash value. Withdrawals reduce the death benefit left to your beneficiaries.
- Borrow money against the cash value of your policy. Unrepaid loans reduce your death benefit. As interest accrues, your outstanding loan balance may surpass your policy's cash value, terminating your policy.
- Pay your premiums using your policy's cash value.
- Surrender the policy (in other words, cancel your insurance) and receive the policy's cash value. Surrender fees as high as 40% can eat up much of the payout.
Learn more >> Benefits of Life Insurance While You're Alive
Uses of Whole Life Insurance
There are several ways whole life insurance can be useful.
- Providing a death benefit can help support a child with special needs, leave an inheritance or pay estate taxes.
- Tapping your policy's cash value can be a good alternative to withdrawing funds from your retirement plan for financial emergencies. Withdrawals aren't taxable unless you take out more than you paid in premiums.
- Loans against your whole life insurance policy may have lower interest rates than personal loans. No credit check is necessary, and you can repay the cash value loan whenever you want.
- Paying premiums with the policy's cash value keeps your coverage in force while reducing your expenses.
Pros and Cons of Whole Life Insurance
Before buying whole life insurance, understand its advantages and disadvantages.
Pros of Whole Life Insurance
- Cash value: You can use the cash value of whole life insurance for expenses such as paying a child's college tuition, covering emergencies or supplementing retirement income. Some whole life insurance policies pay dividends, which can increase the policy's cash value even more.
- Lifetime coverage: Whole life insurance lasts your whole life if premiums are paid, providing lasting protection for your beneficiaries.
- Stability: Whole life insurance offers level premiums and a guaranteed rate of growth, balancing riskier investments in your portfolio.
Cons of Whole Life Insurance
- Expensive: Premiums for whole life insurance are much higher than those for term life insurance. If you can't make the payments, your policy will lapse.
- Beneficiaries don't receive cash value: If you die without using the cash value in your whole life policy, it generally goes to the insurance company, not to your beneficiary.
- Complex: Whole life insurance is more complex than term life insurance. Before purchasing a policy, make sure you understand all the details.
How to Buy Whole Life Insurance
To buy whole life insurance, follow these steps:
- Decide how much coverage you need. Consider your debts, income, future expenses and financial resources when choosing coverage amounts.
- Get quotes from several insurers. You can visit insurance company websites, use a comparison site or get help from an insurance agent or broker. Compare options to find the best policy for you.
- Apply for coverage. In addition to providing your age, weight and gender, expect to answer questions about your health, family medical history, lifestyle and occupation. There may be a phone interview with additional questions.
- Undergo a medical exam. A health care professional usually visits your home to assess your health.
- Receive approval and purchase a policy. Once the life insurance company approves your application, pay your premiums to start coverage.
Learn more >> How to Buy Life Insurance
How Much Is Whole Life Insurance?
The cost of whole life insurance depends on elements including the amount of coverage you buy, your age, your gender and your health. In general, women, healthy nonsmokers and younger people pay less for whole life insurance.
| Average Monthly Cost of Whole Life Insurance | ||||
|---|---|---|---|---|
| Age | Gender | $250,000 Coverage | $500,000 Coverage | $1 Million Coverage |
| 20 | Female | $146 | $287 | $545 |
| Male | $169 | $334 | $639 | |
| 30 | Female | $205 | $408 | $801 |
| Male | $238 | $472 | $920 | |
| 40 | Female | $296 | $588 | $1,161 |
| Male | $355 | $706 | $1,372 | |
| 50 | Female | $462 | $920 | $1,826 |
| Male | $543 | $1,081 | $2,117 |
Source: Policygenius, data as of August 2024
Learn more >> Factors That Affect Life Insurance Costs
Is Whole Life Insurance Worth It?
Whole life insurance provides lifetime assurance of a financial cushion for your family after your death. Cash value you can use during your lifetime is an extra perk. But this pricey insurance isn't for everyone.
Whole life insurance costs significantly more than term life insurance. Because interest rates on whole life policies are generally low, a diversified investment portfolio might be a better way to build your nest egg.
Whole life insurance can be useful in an estate plan for high-net-worth individuals. If you've already maxed out other retirement savings options, a whole life policy might be for you.
What Is the Difference Between Term and Whole Life Insurance?
Both whole life and term life insurance pay a death benefit if you die with your policy in force. However, there are some important ways term life differs from whole life.
- Policy term: Term life insurance lasts for a certain time (the term), such as 10, 20 or 30 years. When the term ends, you may be able to renew your policy or may have to buy a new one. Either way, premiums typically increase as you age.
- Cost: Term life coverage is much more affordable than whole life. On average, a 20-year term life insurance policy with a $500,000 death benefit costs just $30 per month for a healthy 30-year-old man and $23 for a healthy 30-year-old woman, according to August 2024 data from Policygenius. The same amount of whole life insurance costs an average of $472 per month for a healthy 30-year-old man and $408 for a healthy 30-year-old woman.
- Complexity: Term life insurance is easy to understand. You pay premiums, and the policy pays a death benefit if you die with coverage in force.
- Cash value: Term life insurance doesn't build cash value. If you're alive when your term ends, you get nothing in return for your premiums.
Learn more >> Which Is Better: Term or Whole Life Insurance?
Other Types of Permanent Life Insurance
There are other types of permanent life insurance you may want to consider. Although all of them build cash value and last your lifetime if premiums are paid, there are some important differences.
Universal Life Insurance
Universal life insurance offers more flexibility than traditional whole life coverage. Once the cash value of a universal life policy reaches a certain level, you may be able to adjust your premiums to suit changes in your financial situation. You may also be able to adjust the death benefit, although increasing coverage may require another medical exam.
The cash value account's interest rate can fluctuate, and premiums may increase during your lifetime. If you can't afford the payments, your policy may lapse.
Variable Life Insurance
Variable life insurance lets you invest your cash value account in stocks, bonds and mutual funds. Although this could generate higher returns, you also risk losing cash value. Some variable life insurance policies reduce your death benefit if your investments do poorly; others guarantee a minimum death benefit.
Universal Variable Life Insurance
Universal variable life insurance blends elements of universal and variable life. As with variable life insurance, you can choose how to invest your cash value and potentially reap bigger returns. As with universal life insurance, you may be able to change your death benefit and premiums as your policy's cash value grows.
The Bottom Line
Whole life insurance is one way to safeguard your family's finances. A financial advisor can help you decide if whole life coverage fits into your financial plan. An insurance agent or a broker representing several insurance companies can help find life insurance tailored for you.
Whatever kind of life insurance you choose, maintaining good credit may help reduce its cost. Insurers in many states review credit-based insurance scores when you apply for life insurance. Although these differ from consumer credit scores, both are based on your credit report. Actions that can help improve your credit score, such as paying bills on time, may also boost your credit-based insurance score, potentially saving you money on life insurance.