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Whole Life Insurance Explained

Life insurance is a policy that protects your loved ones in the event of your death. There are different types of life insurance policies, the two main types being term life insurance and permanent life. Permanent life insurance consists of whole life insurance and universal life. In this article, we will focus on whole life insurance.

What is Whole Life Insurance?

Whole life insurance is a type of life insurance policy that has a savings component attached. This is called cash value. Every month, a certain portion of the premium goes into a tax-deferred savings account.

Some mutual insurance companies pay dividends to their whole life policy holders as well.

In addition, your survivors are guaranteed to get a lump sum payment when you die (called the death benefit). And the death benefit is not considered as income, thus is not taxable.

It’s called whole life insurance because it lasts for your entire life. While you may pay premiums for only ten, twenty, or thirty years or the whole life at your choice, at the end of your life, your survivors will receive the face value of the policy, plus any interest and dividends invested. 

>>MORE: Term Life Insurance: How It Works and Its Costs?

>>MORE: Differences Between Term Life and Whole Life Insurance

Ed Slott – a renowned tax expert – on tax benefits of IUL policies

Compare quotes of 30+ IUL products

Pros and Cons of Whole Life Insurance

Pros:

Cons:

  • Whole life insurance is much more expensive that term life insurance (can be up to 10-20 times). It is usually justified by the cash value account in whole life policy. Learn more if whole life insurance is a good investment.
  • Whole life insurance is also more expensive than universal life insurance which is arguably a much better choice if you want to have permanent life insurance policies
  • Whole life insurance is comparatively a poor investment compared to other universal life insurance like indexed or variable  
  • Limited control over the investments the policy makes
  • More difficult and higher cost to withdraw money from the cash value of whole life insurance than indexed or variable universal life insurance

Generally speaking, whole life insurance is not a great investment because if you took all the money you spent on premiums and invested it yourself, you would probably make more money. 

Even if you’re really terrible at investing your money and prefer having lifelong insurance coverage, you still have better permanent life insurance options such as Indexed Universal Life Insurance or Variable Universal Life Insurance. Indexed UL is a great cash value universal life insurance that allows you to earn return tied to index such as S&P 500. Variable UL is usually for people who want to maximize their cash value account with investment returns.

>>MORE: Life Insurance Policy: Everything You Need To Know

Quaranteed and Permanent

Yes. Guaranteed Universal Life Insurance (GUL) provides the same guaranteed and permanent coverage for less than half the cost of Whole Life Insurance premiums.

Common Product Features of Whole Life Insurance

Cash value: 

Cash value is one of the two main differentiators of whole life insurance from term life insurance, the other being lifelong coverage vs. a specific term only, aka term life. It is the money your policy accumulates over time. There is usually a guaranteed growth rate according to a formula the insurance company uses. The guaranteed growth rate is the main differentiator of a whole life insurance policy from cash value universal life insurance such as indexed universal life (or IUL) and variable universal life (or VUL). The return rate of cash value account in Indexed UL and variable UL, unlike in whole life insurance, isn’t guaranteed.

You can withdraw the money tax-free by taking out a low-interest loan against the policy, or just surrender the policy altogether and take the cash value. If you do that, it’s taxable income. 

If you take out a loan and die before you pay it back, the money is subtracted from the death benefit paid to your surviving beneficiaries. 

You’ll have to wait quite a few years before the cash value accumulates enough to be able to tap into it. Keep in mind if you just withdraw the money, it will reduce the death benefit. 

When you die, your beneficiaries get the death benefit, which is calculated by the insurance companies and usually a bit more than the coverage amount or the face value of the policy.

You can also use the cash value account as collateral for a loan, known as collateral assignment of life insurance.

>>MORE: Cash Value Life Insurance: Everything You Need to Know

Ed Slott – a renowned tax expert – on tax benefits of IUL policies

Compare quotes of 30+ IUL products

Premiums

Premiums of whole life insurance are usually the most expensive in all types of life insurance, especially term life insurance. Premiums are usually fixed for the whole payment period. You can choose to pay premium for 10, 20, 30 years, or your whole life to have lifelong coverage. Of course, the premiums are different for different payment terms for the same coverage amount.

For similar or even less benefits, whole life insurance policies are usually much more expensive than any universal life policies: guaranteed, indexed, or variable. Learn more why whole life insurance is not worth it since for any goal, there is a universal policy that is not only cheaper, but also offers similar to significant more benefits.

In early years, a bigger portion of premium goes to the savings account since the cost of insurance is relatively cheap when the insureds are still young. In later years when the insureds are older, the cost of insurance becomes more expensive, a smaller portion of premium goes to the savings account.

>>MORE: How Much does Term Life Insurance Cost?

Death Benefits

The death benefit is the cash paid to your beneficiaries when you die. This money is not counted as income and is not taxed as such. However, if the money is held by the insurance company for any reason, beneficiaries may have to pay taxes on the interest earned by the principle. 

If the death benefit is left to an estate, those people who inherit the estate may have to pay estate taxes on it. 

Death benefit of whole life insurance is calculated by insurance companies and the calculation is usually considered as “in a blackbox”. Death benefit is usually more than the coverage amount or the face value of the policy. However, it is not exactly the sum of coverage amount and the cash value account either. This is one of the reasons that more and more people do not prefer whole life insurance due to its complications.

A common misconception of whole life insurance is that there is no medical exam required. Generally speaking, people do sign up for whole life insurance when they’re young and healthy, otherwise the cost would be prohibitive. But there is usually a medical exam required. 

Dividends

A significant share of whole life policies are written by mutual companies. Most mutual companies usually pay dividend to their policy holders. Mutual companies usually provide dividend estimate in their policy illustrations. When calculating and comparing the total costs of whole life insurance vs. universal life insurance, you should take dividend into consideration as well.

Riders

A rider is additional benefits that can be added to a life insurance policy. There are all sorts of riders. Here are the most common:

  • Waiver of premium: You don’t have to pay the premiums if you become disabled and can’t work.
  • Disability income ride:. You can collect regular income from the insurance policy if you become disabled.
  • Accelerated death benefit: If you become terminally ill, you can collect a portion of the death benefit early.
  • Critical illness rider: If you’re diagnosed with a specific illness, you can collect a lump sum.
  • Accidental death benefit rider: This will pay an additional benefit if you die in an accident. Learn more What is Accidental Death Life Insurance? Its Pros & Cons, and Cost?
  • Guaranteed Insurability Rider: This rider allows you to add coverage to your permanent life insurance policy at a later date or during the years of life events like marriage or the birth of a child without having to undergo medical exams or questions.

Adding these riders can increase premiums in some life insurance companies. However, some insurance companies include one or two riders in their whole life insurance as a permanent feature.

Who Should Consider Whole Life Insurance and Who Shouldn’t?

People generally start thinking about life insurance once they have children. This makes sense, since if you don’t have any children or dependents, you don’t really need life insurance. 

Whole life insurance might be a good option for the parents of special needs children, or relatively wealthy people who need tax advantages, or for estate planning, if you can afford pricey premiums.

Whole life insurance might also be a good option for extremely conservative people who really prefer both guaranteed coverage and guaranteed return on cash value account and are willing to pay extremely expensive premiums.

Whole life insurance is also a good option for individuals who just want a $5,000-$40,000 coverage for funeral expenses and cannot qualify for other permanent life products due to bad health or age.

For instance, you might find whole life insurance for veterans who have a disability or are older after leaving the services. They need something extra to cover their potential funeral expenses and debts without having to worry about missing a payment.

Other than these cases, even if you prefer guaranteed permanent insurance coverage, guaranteed universal life insurance is a much cheaper option for you to consider. And if you also like to have a cash value account to supplement your retirement savings, indexed universal life insurance or variable universal life insurance are much better options.

Some may suggest that whole life insurance is a good option for retirement savings. We don’t think so. We examined a real case study to illustrate that other policies such as indexed universal life insurance is much a better option for retirement savings purpose.

>>MORE: Who is Term Life Insurance For?

Quaranteed and Permanent

Yes. Guaranteed Universal Life Insurance (GUL) provides the same guaranteed and permanent coverage for less than half the cost of Whole Life Insurance premiums.

How Much does Whole Life Insurance Cost?

Whole life insurance policies are extremely expensive. Premiums vary by age, gender, health and other risk factors. So each individual will have an unique quote. And insurance companies assess risks differently, therefore should have different quotes for the same individual.

We got quotes from 8 life insurance companies for different ages, male and female, with the best health condition (non smoking). We outlined the lowest quote, second lowest quote, and highest quote and the insurance companies of these quotes for your reference. Keep in mind that even you might believe you fit the profile 100%, your quotes can be entirely different at these companies. So, make sure you work with a life insurance agent or financial advisor so that they can help you compare quotes and select the best policy for you.

>>MORE: How Much does Term Life Insurance Cost?

  Lowest QuoteSecond Lowest QuoteHighest Quote
Person CoveredPolicy AmountQuoteCarrierQuoteCarrier QuoteCarrier
Male age 30$250,000$1,778Cincinnati Life$2,035American National$2,470SBLI
$500,000$3,505Cincinnati Life$4,010American National$4,890SBLI
$1,000,000$6,960Cincinnati Life$7,900American National$9,730SBLI
Female age 30$250,000$1,580Cincinnati Life$1,785American National$2,713Mass Mutual
$500,000$3,110Cincinnati Life$3,510American National$4,395SBLI
$100,0000$6,170Cincinnati Life$6,900American National$8,740SBLI
Male age 40$250,000$2,643Cincinnati Life$3,003American National$3,770Mass Mutual
$500,000$5,235Cincinnati Life$5,945American National$7,490Mass Mutual
$1,000,000$10,420Cincinnati Life$11,770American National$14,820Mass Mutual
Female age 40$250,000$2,308Cincinnati Life$2,683Nationwide$3,197Assurity
$500,000$4,565Cincinnati Life$5,305Nationwide$6,330Assurity
$1,000,000$9,080Cincinnati Life$10,500American National$12,595Assurity
Male age 50$250,000$4,025Cincinnati Life$4,600American National$6,103Mass Mutual
$500,000$8,000Cincinnati Life$9,140American National$12,155Mass Mutual
$1,000,000$15,950Cincinnati Life$18,160American National$24,150Mass Mutual
Female age 50$250,000$3,533Cincinnati Life$4,073Nationwide$4,917Assurity
$500,000$7,015Cincinnati Life$8,085Nationwide$9,770Assurity
$1,000,000$13,980Cincinnati Life$16,110Nationwide$19,475Assurity
Male age 60$250,000$6,290Cincinnati Life$7,260American National$9,940Mass Mutual
$500,000$12,530Cincinnati Life$14,460American National$19,830Mass Mutual
$1,000,000$25,010Cincinnati Life$28,800American National$39,500Mass Mutual
Female age 60$250,000$5,470Cincinnati Life$6,155Nationwide$8,108Mass Mutual
$500,000$10,890Cincinnati Life$12,250Nationwide$16,165Mass Mutual
$1,000,000$21,730Cincinnati Life$24,440Nationwide$32,170Mass Mutual

>>MORE: How Much does a $5 Million Whole Life Insurance Policy Cost? and How Much does a $2 Million Whole Life Insurance Policy Cost?

Last Thoughts

Whole life insurance isn’t that great an investment. It might be a good option for the parents of special needs children, or relatively wealthy people who need tax advantages. Otherwise, you could invest the money yourself and have more control over where it goes. You might make more money this way as well. If you just need insurance to make sure dependents are provided for in the event of your death, term life insurance should fit the bill.

If you really prefer having permanent lifelong insurance coverage, you can also consider a cheaper alternative guaranteed universal life insurance. If you also like to have cash value account to supplement your retirement savings, you can consider indexed universal life insurance or variable universal life insurance instead.

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