What Is Whole Life Insurance?

Maggie Overholt
Maggie Overholt

What Is Permanent Life Insurance?

The first thing to know about whole life insurance: It’s actually a type of permanent life insurance. As a broad category, permanent life insurance is the alternative to term life insurance. It has no expiration date, meaning that a death benefit payout is guaranteed (whereas term life policies only pay out if the insured person passes away during their policy’s specified time limit).

Whole life is the most popular form of permanent life insurance and the one we’ll be addressing here — however, guaranteed universal life (GUL) is another type worth considering if you’re a senior citizen. GUL offers a modified, more affordable version of permanent insurance for seniors with reduced life insurance needs. You can learn more about GUL here if that sounds right for you.

What Is Whole Life Insurance?

Whole life insurance covers you — you guessed it — for your whole life, from the day you buy your policy onward. The main function of whole life insurance is to provide a “death benefit,” which is the lump-sum payment an insurer will dole out when the insured person passes away. Unlike the more basic term life insurance, though, whole life has value outside the death benefit, including a cash value component and plenty of add-on coverage options.

How Does Whole Life Insurance Work?

Unlike term life insurance, which only covers you for a set time period, whole life insurance doesn’t have an expiration date. As long as the policyholder keeps paying premiums, their insurer promises to pay out when they pass away — whether that’s at age 85 or 105.

While premiums for whole life are higher than those of term life, a portion of each monthly whole life payment gets deposited into an interest-earning “cash value account,” which the insured person can then borrow from or invest throughout their lifetime. Cash value can also be used as means for setting up tax-free inheritance or estate planning.

People also often choose to enhance their whole life policy with “policy riders” (supplemental coverage options) that might allow them to extract value from the insurance during their lifetime. The most popular example of this is an accelerated death benefit rider, which lets the insured person use a portion of their policy’s death benefit during life to cover costs associated with a critical illness.

These types of coverage add-ons are especially valuable for whole life insurance (as opposed to term life); a whole life policy’s longer duration means that there’s a much greater chance that the policyholder will develop health complications while covered and end up needing to access their policy’s funds.

How Much Does Whole Life Insurance Cost?

Whole life insurance is vastly more expensive than term life. Premiums often creep up to $200 to $300 per month or more, which is around 10 times more expensive than term insurance for a healthy individual. Of course, as with all life insurance policies, premiums for whole life are highly variable. Rates can spike or drop based on age, health, pre-existing conditions, tobacco use — the list goes on.

Pro tip: If you’re looking at whole life insurance prices, be sure to compare a few term life insurance quotes as well (you can get these online) so you have an idea of how each type would fit into your monthly budget.

To find out how much whole life insurance would actually cost for you, you’ll need to speak with an insurance agent. Because it’s such a complex product with weighty financial implications — after all, you’ll be paying those large premiums for your whole life — companies don’t offer whole life insurance quotes online.

Start with an independent agent if you’re still shopping around. Independent agents represent multiple companies, so they can help you compare rates and coverage without egging you toward any one provider.

Why Is Whole Life Insurance so Expensive?

Whole life insurance can cost up to 10 times more per month than term life — even when looking at two policies with the exact same death benefit amount. Why is whole life so much pricier than term? There are two big reasons for the disparity:

  • Whole life insurance guarantees a death benefit payout.
    Since permanent life insurance policies never expire, the company is essentially promising to pay out on the death benefit when the insured person passes away (as long as they’ve consistently kept up with premium payments). Insurers charge higher premiums for whole life insurance because they know they’ll have to shell out a lot of money when the policy terminates.
  • Whole life insurance includes a cash value component.
    Whole life insurance isn’t just a financial safety net. It also comes with a cash value account that provides a channel for savings or inheritance. Part of the reason whole life premiums are so steep is that a portion of each monthly payment gets deposited into that account, where it will accrue interest over time and plump up your nest egg.

Is Whole Life Insurance Worth It?

The guaranteed death benefit and cash value attached to whole life insurance look very attractive at face value. However, it’s important to remember that you must pay steep premiums in full, every month, for a lifetime, in order for those benefits to kick in. It’s a serious investment — one that shouldn’t be taken lightly, considering that more than 20% of whole life policies lapse within the first two years alone due to payment failure, according to the Life Insurance Market Research Association.

Our recommendation? Sit down with a financial planner or wealth management specialist prior to purchasing a whole life insurance policy. Hash out the details about projected cost, how premiums would factor into your monthly budget, and whether a whole life policy would have greater benefit for you than a cheaper term life policy paired with a traditional savings account.

Who Should Get Whole Life Insurance?

There are a few select cases where financial experts will generally suggest whole life insurance, most of which point toward individuals with complex financial portfolios. Life insurance experts we’ve spoken with have recommended whole life policies for:

  • Individuals or couples with complex estate taxes/estate planning needs
  • Individuals or couples who want to set up a tax-free inheritance or trust
  • Individuals who have maxed out IRA or 401(k) contributions and need an alternate vehicle to put away retirement savings

That’s not to say these are the only people who could benefit from investing in a whole life policy — however, it should give you an idea of the types of scenarios in which considering whole life insurance might be the right move.

How Do I Choose a Whole Life Insurance Company?

The right whole life insurance policy will look a little different for every customer. That means the “best” insurance provider varies from person to person, too. Still, there are a few universal things to look for when choosing a whole life insurance company. You can read up on these criteria in detail here, or start with the list below for a brief overview.

Regardless of policy size or added benefits, your whole life insurance company needs to meet these five basic standards:

  • Solid financial backing that can be trusted for the long haul. You can find financial ratings from agencies like A.M. Best, S&P Global, and Moody’s Investor Services
  • Excellent customer service to help you manage this complex policy. We recommend checking satisfaction scores from consumer survey group J.D. Power
  • Flexible death benefit and coverage options that can be tailored to your needs
  • Options to purchase health-related coverage “riders” that can help pay for serious illnesses during the insured’s lifetime
  • Rates that are competitive for your individual situation

With regard to “competitive rates,” remember that life insurance prices are highly personal. Your premium depends on a large number of factors specific to you, from your age and health to your family history, occupation, and more. Every company weighs these factors a little differently when determining cost, which means that some will end up being cheaper than others. (For instance, one provider might offer friendlier rates for tobacco users, while another might have fair prices for people with pre-existing health conditions.) Take the time to compare multiple whole life quotes before you buy and be sure you’re getting the best price.

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About the Authors

Maggie Overholt

Maggie Overholt Contributor

Maggie is a former lead insurance editor at Reviews.com. She's written more than 70 insurance articles covering homeowners, auto, life, motorcycle, travel, and more.