Understanding Whole Life

Whole-life insurance is a form of permanent life (cash-value) insurance. Compared to term insurance that has a contractual expiration date and only handles death benefits, whole-life insurance covers you for your entire life and contains an investment component as well as a death benefit.

A whole life policy calculates your premiums based on your actuarial risk at the time you purchase the policy, with an overage to be invested to build cash-value (and of course to compensate the insurance salesman). These premiums stay the same throughout the life of the policy.

Premiums for whole life policies in the early years are considerably higher than for term policies providing the same death benefit. However, premiums for term policies and their renewals will increase substantially in later years as your actuarial risk rises, creating a crossover point of affordability.

Many experts do not recommend buying a whole-life policy, arguing that you would be better off buying term insurance and investing the difference. In that case, your expected greater return on investment can blunt your higher insurance premium costs in later life.

However, there are cases where whole life insurance makes sense.

Long-Term Policy Preference – If you just want to provide coverage for your entire life and never have to worry about renewals, whole-life may be for you. Once you reach a certain point of cash-value, you can apply it against the premium payments and have fewer regular payments to worry about. The payoff point for whole-life policies can vary, but 15-20 years is a reasonable estimate. The worst thing you can do is to cancel your policy within the first ten years – unfortunately, around 40% of whole-life consumers do just that.

Because of the lower cost of term insurance when we are younger, and the long return time of whole-life insurance, there is a sweet spot between early adulthood and into middle age where either purchasing a whole-life policy or converting a term policy to whole-life makes sense. If you wait too long to convert to whole-life, you are unlikely to live long enough to reach the payoff point.


Saving/Investment Concerns – If you lack the discipline to save money on your own, lack investing acumen, don't like managing your own investments, or have been burned by past investment cycles, you may prefer the security of a guaranteed return from a whole-life policy. The return will be considerably lower than stocks – usual guarantees are 2-4% with typical returns of 3-6% – but it is better than following poor investing principles like chasing hot stocks.

Portfolio Fit – If you have other investments that meet your growth components and you have maxed out your 401(k) and other tax-advantaged contributions, a whole-life policy could fit well into your portfolio. You could easily fill this need with other conservative investments such as savings bonds, but if you need life insurance as well, whole-life is a reasonable choice.

Children – Buying a whole-life policy for your child early in life can provide coverage and significant cash value. They may be able to pay premiums completely from the cash value component in adulthood. This is not the highest return you can get for your children, but it is secure.

Your main decision point on whether to go term-life or whole-life will be in the early adulthood years, just when your cash is pulled in many different directions: mortgage, car loans, investments, retirement planning, not to mention starting a family. If you prefer the security of whole life compared to the control and responsibility of managing your own investments, then consider a whole-life policy, but do it early enough in life to receive the benefits and stick with it.