Whole Life Insurance: What It Is and How It Works

Do you want to ensure that your loved ones are cared for financially even after you’re gone? If so, you may want to consider buying whole life insurance. Whole life insurance is permanent life insurance that covers your entire lifetime. It can be a great way to protect your family’s financial future after death. This guide will discuss what whole life insurance is and how it works. We will also discuss the pros and cons of buying this policy. Then shop and compare quotes to find the best premium rates.

What Is Whole Life Insurance?

A whole life insurance policy is a type of permanent life insurance that provides coverage for your lifetime. It is also known as straight life or ordinary life and offers lifelong protection to beneficiaries in the event of your death. In addition, it can provide cash value buildup over time, and you can borrow against it if needed. The premiums are typically more expensive than term life insurance, but coverage is guaranteed for the duration of your life and may offer other benefits.

Whole life insurance can provide financial security for you and your family in case of unexpected death. Understanding the different features associated with a whole life policy is essential to decide which type of coverage is right for you. Consider speaking to a financial professional about the specifics of your policy and how it can best meet your needs.

How Does Whole Life Insurance Work?

Whole life insurance is a permanent policy offering unparalleled protection, lasting throughout your lifetime. With this coverage in place, you can be sure that you and those who depend on you are always taken care of.

The premiums you pay on a whole-life policy will stay the same for the duration of the policy unless you choose to increase them. Your policy will also gain value over time, allowing you to access the cash value in your policy when needed. The death benefit of a whole life policy is generally fixed, meaning that it doesn’t change no matter how long you have the policy or how much money you have put into it.

Whole life insurance provides many benefits, including tax advantages and a guaranteed return. It is also an effective way to ensure your loved ones are financially taken care of in the event of your death.

How Much Does Whole Life Insurance Cost?

Whole-life insurance costs depend on age, health status, and lifestyle. Generally speaking, younger people in good health pay less for coverage than someone who is older and has poor health.

The cost of a whole life insurance policy also depends on the coverage limit you choose. The more coverage you want, the higher your premium will be. However, with whole life insurance, part of your premium goes into an investment account, allowing you to accumulate a cash value that can be used in the future or borrowed against if needed.

Whole Life Insurance Quotes

Find out how much life insurance you need and can afford with our whole life insurance quoting tool. Then, after determining how much coverage you need, compare quotes, and request a quote below.

Whole Life Insurance Rates

Whole life insurance premiums, sometimes called straight life insurance, are typically fixed and do not adjust over time like universal life insurance. These are sample monthly premium rates based on age, gender, coverage amount, Preferred status, and non-tobacco consumers.

The Pros and Cons Of Whole Life

Pros

• The coverage is for an entire lifetime and does not expire as long as you pay premiums.
• The policy is straightforward to understand.
• Policy owners can earn a guaranteed fixed interest rate on their cash value.
• Similar to an IRA, your policy grows tax-deferred.
• Like a ROTH IRA, you can pull money out of your policy without paying taxes.
• Unlike qualified accounts such as 401(k) and IRAs, you can access the policy cash values pre-59.5 without incurring taxes or penalties.
• Unlike a 401(k) and Traditional IRA, you can access the policy cash values without increasing your Social Security tax or Medicare premiums.
• Your policy grows based on the guarantees of the insurance carrier and can grow even more based on dividends.
• Your beneficiary receives the death benefit income tax-free.

Cons

• The coverage is expensive.
• Policyowners will pay higher fees.
• The fixed interest rates can be low.

What Are The Main Factors That Affect Whole Life Insurance Premiums?

The main factors affecting whole-life insurance premiums are your age, gender, health, lifestyle, occupation, and the coverage amount you select.

Age is a significant factor in calculating your premium, as younger people generally pay lower premiums than older people. Gender also plays a role in determining your premium, with women often paying less than men.

Health and lifestyle can also affect your premium since people with healthier habits and lifestyles tend to pay lower premiums. Your occupation is also considered when calculating the premium you will be required to pay, as those in more dangerous occupations are likely to pay higher premiums.

Finally, the coverage amount you select significantly affects your life insurance premiums, as higher coverage amounts tend to cost more.

How Long do You Pay Premiums on Whole Life Insurance?

The time you pay on whole life insurance depends on your chosen policy. Generally, there are two types of policies – level premium and increasing premium. With a level premium policy, your premiums will remain the same throughout the policy’s life. This means you will need to pay the same monthly amount for as long as the policy is in effect.

With an increasing premium policy, your premiums will increase over time, typically to keep up with inflation or rising insurance costs. As a result, with this type of policy, you may pay premiums for much longer than with a level premium policy.

The Benefits of Whole Life Insurance

• Life insurance coverage lasts for an entire lifetime.
• The whole life is easy to understand.
• Owners can earn a guaranteed fixed interest rate on their cash value like a Certificate of Deposit or Fixed Annuity.
• Some whole life insurance products accept funding from a 401(k) or IRA.
• Some policies allow policyholders to access the death benefit (while alive) as long-term care insurance.

Is Whole Life Insurance A Bad Investment?

Unless you require permanent life insurance coverage, whole life insurance is usually a poor investment. However, if you’ve already used up all your retirement accounts and have a diverse portfolio, whole life insurance may be a wise investment if you need lifelong coverage.

Consider that whole life insurance protection is expensive and takes many years to generate adequate investment returns. As a result, it’s usually only a viable option if you’re young, affluent, and wish to leave money to your relatives.

How does whole life insurance work as an Investment?

When you pay premiums, some of the money goes to the cost of insurance and administrative fees. And the rest is put towards a “cash value.” This cash value can be used in many ways. For example, it could be used for retirement.

A cash value is like an investment account you can use inside your life insurance policy. The money grows at a guaranteed rate over time. If you don’t withdraw, the cash value should equal the death benefit when you turn 100.

A whole life insurance policy’s cash value accumulates tax-deferred, just like a 401(k) or IRA. Contributions to a whole life insurance policy are not tax-deductible.

Accessing Your Whole Life Insurance Policy’s Investment Gains

You can take out a loan where the insurer holds your money and gives you a loan with cash value as collateral. Your cash value grows according to interest rates set in the policy. You don’t need to pay back this loan.

Policy Loans

You must pay interest on the loan, which is added to your outstanding balance if you do not pay it off. If your financial value is insufficient, your policy expires, and you must pay taxes on the money. The outstanding amount will be taken from your beneficiaries’ death benefit when you pass away.

Dividends

When you take life insurance, you can get your dividends in cash. However, you must pay taxes if it is more than what you paid in premiums.

Withdrawals

You can withdraw money from this policy. You will have to pay a fee, but you do not need to pay taxes on the money. That’s because you already paid for it with your premiums.

Sell The Policy

You can sell your insurance policy for an amount higher than its cash value but less than the death benefit. The buyer will take over paying the premium payment and become the beneficiary.

Canceling The Policy

You can surrender your policy to the insurance company if you no longer want to be covered. It will give you the cash surrender value if you do this. However, the first ten years of your life insurance will have high fees for returning it, which is one of the reasons that whole life insurance should not be considered a short-term investment.

What Is the Difference Between Whole Life and Term Life Insurance?

Whole life insurance is a form of permanent life insurance that combines death benefit protection with cash value accumulation. The policy covers the insured’s entire life, provided premiums remain current. A whole-life policy typically has level premium payments and provides a guaranteed rate of return on the cash values within the policy.

Term life insurance is temporary life insurance that provides death benefit protection for a certain period, usually 5 to 30 years. It has no cash value accumulation like whole-life insurance and generally requires lower premiums than whole life policies. However, if the insured outlives the term period, the policy lapses, and all benefits are lost.

The main difference between whole life and term life insurance is the length of coverage: Whole life provides permanent coverage, while term life is temporary.

• Additional Reading: Term vs. Permanent Reading
• Additional Reading: Life Insurance, Whole vs. Term: Which is Better?

What is The Difference Between Whole Life and a Universal Life Insurance Policy?

Flexibility is the most significant difference between whole life insurance and universal insurance. Whole life insurance policies are more rigid, with fixed premiums and benefits that stay the same throughout the policy.

Universal life insurance is highly versatile, allowing you to determine your premium and coverage amounts. Plus, when money gets tight, premiums become even more flexible so that you can pay less in those moments of difficulty. On top of this added flexibility comes an attractive bonus; each policy accumulates a cash value over time on a tax-deferred basis! This means that one day it may provide retirement income or help finance other future needs – without borrowing from another source!

In conclusion, whole life insurance is more rigid, with fixed premiums and benefits that stay the same throughout the policy. On the other hand, universal life insurance provides more flexibility, allowing you to choose your coverage amount and when you pay those premiums.

What Is Graded Whole Life Insurance?

A graded whole life insurance policy pays less if you die within the first few years after purchasing an insurance policy. Likewise, a graded benefit contract pays less if you die early in the early years of coverage. Only after several years of coverage have passed does the death benefit rise to the original face value.

This is an approach utilized by life insurance providers to decrease the cost of policies for people who are considered unhealthier and might already be seeking guaranteed issue coverage. In addition, graded benefits decrease the risk assumed by life insurance companies that accept applications from terminally ill individuals.

What is Simplified Issue Whole?

Simplified whole life insurance is total or complete life insurance. It lasts your entire life. It is for people 60 and older with health problems that cannot get standard coverage.

If you apply for simplified life insurance, you will not have to undergo a medical exam. Instead, you may have to conduct a phone interview and only answer some health questions on an application. Because the health evaluation is not as thorough, insurers set a higher premium with less coverage.

The underwriter assumes you will be too risky to insure without a medical check. But some people can’t get insured because they have disqualifying conditions. For example, if your age and health are reasonable, you might not be able to get insurance.

What Is Modified Whole Life Insurance?

Modified whole life insurance usually has a lower premium for the first two to three years. After that, your premiums might increase, but usually not too much. That means you can get a higher death benefit immediately rather than buying a lesser amount and increasing your coverage later.

Dividends are one way in which whole life insurance policies provide additional benefits. Dividends refer to the yearly payments from the insurer’s profits to policyholders. They are not guaranteed; the amount paid out each year can vary. The insurer uses a variety of factors to determine how much they will pay out in dividends, such as their financial performance and any changes in overall mortality rates.

Dividends from whole-life insurance policies can be used in several ways. For example, policyholders can receive them as cash payments, use them to purchase additional insurance coverage, or they can be used to reduce the policy’s premiums. In addition, dividends may increase the death benefit of the policy. This can be beneficial if the insured person passes away with outstanding debts or other expenses that must be paid out of their estate.

What Types of Riders Are Available For Whole Life Insurance Policies?

Whole life insurance offers various riders or optional additions to the policy that provide additional benefits.

These can include:

• Guaranteed Insurability Rider: Allows you to purchase additional coverage, even if your health has changed since taking out the policy
• Disability Income Rider: Pays you a portion of your death benefit if you become disabled and cannot work.
• Waiver of Premium Rider: Pays you a portion of your death benefit if you become disabled and cannot work.
• Long-Term Care Rider: Provides coverage for long-term expenses such as assisted living, nursing home care, and even in-home care.
• Accelerated Death Benefit Rider: Provides access to a portion of your death benefit while you are still alive if you are diagnosed with a terminal illness.

What is Cash Value Accumulation in Whole Life Insurance?

Cash value accumulation in a whole life insurance policy is building up cash within your policy that you can use while alive. This money is set aside from your premiums and grows at a predetermined rate depending on your policy type and the performance of your insurer’s investments. Whole life usually offers higher premiums than other life insurance policies because the insurer provides something more—the ability to build cash value.

The accumulated cash value can be used in various ways while you are still alive. Depending on your policy, you may be able to take out small loans against it or use it as collateral for larger loans. Additionally, you can cash it out entirely or use it to supplement your retirement savings.

When Does Whole Life Insurance Make Sense?

Whole life insurance is good if you want to accumulate cash value over time, have guaranteed premiums, and provide lifelong coverage. It’s also ideal for supplemental retirement income planning or estate planning.

Whole life insurance can cover funeral costs, medical bills, and other final expenses. And because it builds cash value, you can use it for college tuition or other investments to pass on to the next generation. Whole life works best if you’re investing long-term and want a policy that offers flexible premium payments and consistent coverage.

The Best Whole Life Insurance Policies

• Gerber Life Insurance
• Transamerica
• Baltimore Life (For IRA and 401k)
• Nationwide
• OneAmerica (For long-term care insurance)
• Oxford Life

A Cheaper Alternative

Looking for affordable whole life insurance but can’t afford it? A cheaper alternative for consumers seeking to primarily leave a death benefit to beneficiaries, term life insurance offers coverage at a fraction of the cost.

If you need affordable help with setting up a will, trust, or estate plan, we recommend:

Next Steps

Whole life insurance is permanent life insurance that covers your entire lifetime. The policy is straightforward to understand, and the coverage doesn’t expire. In addition, policy owners can earn a guaranteed fixed interest rate on their cash value, which can be helpful if they need to access those funds. While whole-life policies are expensive, fees are typically lower than other permanent life insurance policies. That said, the fixed interest rates offered by insurers can be low, so shopping around before buying a whole life insurance policy is essential. Request a quote below and see how much you could save on this valuable form of protection.

Need Help Getting Life Insurance Coverage?

If you have a preexisting medical condition and want to buy life insurance, you will need help from an expert. This person can help ensure you get coverage, so you don’t get declined.

Warning: Applying for life insurance without a medical exam can be risky. If you get declined coverage, it could be at least two years before you can get any life insurance.

Frequently Asked Questions

Related Reading

• Limited Pay Life Insurance
• 10 Pay Life Insurance

*Disclosure: Some of the links in this guide may be affiliate links. I may receive a commission at no cost if you purchase a policy. It helps us keep the lights on!