Whole life insurance explained

Like all permanent life insurance policies, whole life provides lifelong coverage and includes an investment component known as the policy’s cash value. The cash value grows slowly, tax-deferred, meaning you won’t pay taxes on its gains while they’re accumulating.
You can borrow money against the account or surrender the policy for the cash. But if you don’t repay policy loans with interest, you’ll reduce your death benefit, and if you surrender the policy, you’ll no longer have coverage.

Although it’s more complicated than term life insurance, whole life is the most straightforward form of permanent life insurance. Here’s why:

  • The premium remains the same for as long as you live
  • The death benefit is guaranteed
  • The cash value account grows at a guaranteed rate

Some whole life policies can also earn annual dividends, a portion of the insurer’s financial surplus. You can take the dividends in cash, leave them on deposit to earn interest or use them to decrease your premium, repay policy loans or buy additional coverage. Dividends are not guaranteed

Policy differences

Cost comparison between Term and Permanent Insurance

Term life insurance is cheap because it’s temporary and has no cash value; in most cases, your family won’t receive a payout because you’ll live to the end of the term. Whole life insurance premiums are much higher because the coverage lasts for a lifetime, and the policy has cash value, with a guaranteed rate of investment return on a portion of the money that you pay.

Below are price comparisons between term life and whole life insurance. We used 20-year and 30-year term life policies because no apples-to-apples comparison is possible for the length of term life to whole life.

Choosing between term and whole life insurance

Term life is sufficient for most families who need life insurance, but whole life and other forms of permanent coverage can be useful in certain situations. Such as:

Choose term life if:

  • You need life insurance only to replace your income over a certain period, such as the years you’re raising children or paying off your mortgage
  • You want the most affordable coverage
  • You think you might want permanent life insurance but can’t afford it. Most term life policies are convertible to permanent coverage. The deadline for conversion varies by policy.

Choose whole life if:

  • You want to provide money for your heirs to pay estate taxes.
  • Without a life insurance payout, your heirs might be forced to sell off parts of the estate, such as heirlooms or property, to pay the tax bill. Converting these assets into cash may not be timely.
  • You have a lifelong dependent, such as a child with special needs. Life insurance can fund a special needs trust to provide care for your child after you’re gone. Consult with an attorney and financial advisor if you want to set up a trust.
  • You want to spend your retirement savings and still leave an inheritance or money for final expenses, such as funeral costs. With a whole life policy, your beneficiaries get a payout no matter when you die.
  • You want to equalize inheritances. If you plan to leave a business or other property to one child, you could use whole life insurance to compensate your children