Whole Life Insurance

What Is Whole Life Insurance?

Whole life is a type of permanent life insurance. The goal of a permanent policy is to have life insurance in place for the rest of your life. That's different from term life insurance, which covers you for a specific length of time, such as 20 years.

All whole life policies have three elements: premiums, a death benefit and cash value. The premium is the amount of money you pay for the policy. Depending on the policy, you pay the premium in a large one-time lump sum, once a year or monthly.

Because you keep a whole life policy for the rest of your life and might not want to be paying for it after you retire, some life insurance companies have other payment arrangements. Life Insurer offers payment plans for 15 years, 20 years and 25 years. It can also structure your payments to end when you reach age 65 or 100. With one of these arrangements, your payments are higher over a shorter payment period while ensuring later that your life insurance policy doesn't lapse when you are on a fixed income in retirement.

Premiums don't always remain the same over the course of your lifetime. A policy that was affordable when you were 40 may become too expensive when you reach 65. You can safeguard against rising costs by looking for a policy with premiums that are guaranteed to remain the same.

The death benefit is the money your beneficiaries receive after your death. You select this coverage level based on your financial needs and goals.

A portion of your whole life insurance premium is allocated as cash value. This money has several advantages. It can keep your premiums the same throughout your lifetime, with the life insurance company withdrawing from your cash value instead of charging you more as you age. This is also how your policy stays current when you are 75 and you choose a payment arrangement that ends at age 65.

The cash value tends to grow very slowly and often doesn't increase at all during the early years of your policy. As it accumulates to a sizable amount, some companies let you borrow this money. You'll pay fees and finance charges on this loan, and you'll need to make sure your policy doesn't lapse because of a lack of funds in your account.

While your beneficiaries will receive a death benefit after your death, they typically don't collect any of the cash value that remains. If you cancel the whole life insurance policy before you die – called surrendering the policy – you often get back a portion of the accumulated cash value.

Some policies pay dividends, similar to an investment like a mutual fund. The amount you receive depends on the company's performance for the year as well as your cash value. You can elect to receive your dividends as cash, apply it toward your death benefit, or apply it toward your premiums, depending on the policy's terms. Dividends usually aren't guaranteed, and some companies have better track records than others of paying these on a regular basis.

Who Should Get Whole Life Insurance?
Any adult who is financially responsible for others – such as a spouse, kids or aging parents – should get life insurance. However, whole life insurance is not a good option for many people. Its biggest drawback is that it is much more expensive in comparison to term life insurance. 

You should not get whole life insurance if you are seeking a way to grow wealth that you can use during your lifetime. Even though some policies have a cash value component or pay dividends, earnings typically lag those from other investment vehicles. Furthermore, if you want to tap into your cash value, you'll typically have to pay interest and other fees to do so. This money also doesn't pass to your beneficiaries when you die.

There are a few scenarios where whole life insurance does make sense. If you have a term life insurance policy that is expiring, you may have the option to convert this into a whole life policy without taking a medical exam. This option is appealing if you still want life insurance but have a serious illness or other health concern, which may drastically increase your premiums or disqualify you entirely from getting a new life insurance policy.