What is whole life insurance?

Whole life insurance, also known as permanent life insurance, doesn’t expire unless you fail to keep up with premium payments. That means it’s a type of life insurance that can cover someone’s entire life. In many cases, the premium amount remains unchanged as long as the policy is in effect.

A whole life insurance policy features two key components: a savings benefit and a death benefit. This life insurance coverage might be ideal for someone who wants to build up savings on a tax-deferred basis and wants to leave their heirs with a death benefit that typically avoids federal taxes.

Read on to learn more about whole life insurance and how it compares with other types of life insurance.

Key takeaways

  • Whole life insurance offers lifetime coverage as long as the premiums are paid.

  • Premiums for a whole life insurance policy stay the same while the coverage is in effect.

  • Features of whole life insurance include a death benefit paid to the policyholder’s beneficiaries and a savings component known as cash value.

  • Because it covers the policyholder’s entire life, whole life insurance usually costs more than other kinds of life insurance.

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Whole life insurance definition

Whole life insurance is one type of insurance product in the family of life insurance policies.

When someone buys a whole life policy, they are covered from the time their policy takes effect until they die—unless the premiums go unpaid. The premiums never go up. 

The insurer guarantees a certain rate of return on the policy’s cash value. A policyholder may be able to withdraw cash or take out a loan against the cash value, and the policy might even pay dividends. Once the policyholder dies, the policy pays a death benefit to the policyholder’s heirs. The death benefit is a guaranteed amount that is usually paid in a lump sum.

How does whole life insurance work?

When someone purchases whole life insurance, they choose the coverage amount—known as the death benefit—and the insurer figures out how much their premiums will be based on factors such as the buyer’s age, gender and health.

A whole life policy generally costs more than a term life insurance policy, as a whole life policy lasts an entire lifetime while a term life policy lasts only for a set number of years.

If you obtain whole life insurance on your own, you might be required to undergo a medical exam. But if you obtain it through your employer—known as group life insurance—you are typically able to skip the medical exam.

Typical features of whole life insurance include:

  • Consistent premiums

  • Fixed death benefit

  • Cash value

Whole life insurance premiums

The premium for whole life insurance is based on the amount of coverage you purchase, along with factors like your age, gender and health. You might be able to pay the premium monthly, quarterly, twice a year or annually. The premium is a fixed amount, and the payments go toward the policy’s death benefit and cash value.

In most cases, life insurance premiums of any kind, including those for a whole life policy, don’t qualify for tax write-offs.

Cash value life insurance

A whole life policy typically includes a cash value. The cash component of the policy earns interest at a fixed interest rate.

Generally, someone can withdraw money from the savings portion of a whole life policy or take out a loan against the cash value. The cash value grows on a tax-deferred basis.

Federal income tax is due on cash withdrawals from a whole life policy based on the difference between cash value and the amount of the premiums that have been paid. Loans from a whole life policy aren’t subject to federal taxes, though.

Death benefit

A death benefit is paid to the beneficiary of an annuity, pension or life insurance policy. In the case of the death benefit for a whole life insurance policy, it’s a guaranteed amount of money that’s usually paid in a lump sum.

Normally, the death benefit from a whole life policy isn’t subject to federal income taxes. However, a beneficiary might be required to pay taxes on the policy’s accumulated interest.

Whole life insurance beneficiaries

A beneficiary for a whole life insurance policy is a person or organization that the policyholder has designated to receive some or all of the death benefit after the policyholder dies.

Examples of life insurance beneficiaries include:

  • Spouses

  • Children

  • Trusts

  • Estates

  • Charities

If a policyholder didn’t name a beneficiary, the death benefit goes to the deceased person’s estate.

How much is whole life insurance?

The cost of whole life insurance varies widely, depending on potential factors such as:

  • Amount of the death benefit

  • Age

  • Gender

  • Health status

  • Family medical history

  • Occupation

  • Lifestyle

  • Tobacco use

  • Policy add-ons (known as riders)

Data published in June 2023 by the Policygenius insurance marketplace found the average monthly cost of whole life insurance ranged from $251 for a 25-year-old female nonsmoker with a death benefit of $250,000 to $6,376 for a 55-year-old male nonsmoker with a death benefit of $1 million. These averages are based on the premiums being fully paid at age 65.

By comparison, according to Policygenius data from June 2023, the average monthly cost for a 20-year term life insurance policy ranged from $14.30 for a 25-year-old female nonsmoker with a death benefit of $250,000 to $208.08 for a 55-year-old male nonsmoker with a death benefit of $1 million.

How to get a whole life insurance quote

Among the ways to get a quote for whole life insurance are:

  • Through an independent insurance broker representing several companies

  • Through an insurance agent working for a specific company

  • Directly from an insurance company

  • Through an online comparison site

Keep in mind that costs and coverage vary from one insurer to another. Therefore, it’s wise to shop around and get quotes from several insurance companies.

Whole life insurance riders

Riders are extra benefits that you can add to a whole life insurance policy at an extra cost. Among the types of whole life insurance riders available are:

  • Accidental death rider: This rider pays a bigger death benefit if the policyholder dies in an accident that’s covered by the rider. 

  • Guaranteed insurability rider: This rider enables the policyholder to buy more coverage in the future without undergoing a medical exam or answering health questions.

  • Waiver of premium rider: This rider waives or pays the policyholder’s premiums if the policyholder is seriously ill or disabled and is no longer able to work or pay premiums.

  • Accelerated death benefit rider: This rider allows the policyholder to get cash from the policy if they’re diagnosed with a terminal illness.

  • Long-term care rider: This rider enables the policyholder to get some of the cash from their policy as an accelerated death benefit to help cover the costs of long-term care.

Types of whole life insurance

Within the category of whole life insurance, several policy types are available. They include indexed whole life insurance, single premium whole life insurance and joint whole life insurance.

Indexed whole life insurance

Indexed whole life insurance—also known as indexed universal life insurance—pays a death benefit plus a cash value benefit. But unlike a traditional whole life insurance policy, the cash value of an indexed whole life insurance policy is connected to the performance of a stock market index such as the S&P 500. However, the cash isn’t directly invested in the stock market.

The amount of interest a policyholder can earn with an indexed policy has generally both a cap and a floor or a maximum or minimum amount. Since the policy’s cash value is tied to the stock market, the interest rate can fluctuate.

Single premium whole life insurance

Single premium whole life insurance enables someone to buy coverage by paying just one premium. In other words, no premiums are due throughout the rest of the policyholder’s life. However, the single upfront premium might be $5,000 or more.

Just like a traditional whole life policy, a single premium policy offers a death benefit and a cash benefit.

Joint whole life insurance

Joint whole life insurance covers not one person but two people. This allows a married or unmarried couple to buy one policy that covers both of their lives.

Although joint whole life insurance might cost less than buying two separate policies, the death benefit is also less than it would be with two separate policies. That’s because the death benefit is paid only when one of the two people dies, either the first survivor or the second survivor.

What is the benefit of whole life insurance?

Whole life insurance offers several potential benefits, such as guaranteed lifetime coverage, fixed premiums, a fixed death benefit and an interest-bearing “cash value” benefit. The benefits of whole life insurance should be weighed against the often high cost compared with other types of life insurance.

How to surrender a whole life insurance policy

When someone surrenders a whole life insurance policy, they’re cashing it in. This means the policyholder will surrender, or cancel, the coverage while they’re still alive in exchange for an amount of money that typically comes in a lump sum.

The “cash surrender value” of the policy isn’t the same as the cash value, though. If someone surrenders their policy, they’ll receive the amount of money they’ve accumulated so far—the cash value—minus any fees or charges. On top of fees or charges, the cash payout might be taxed.

Alternatives to whole life insurance

Whole life insurance isn’t the only option for life insurance. Others include term life and universal life insurance.

Term life insurance

Term life insurance lasts for a set period of time—such as 10 or 20 years—while whole life insurance lasts a lifetime as long as the premiums remain paid. Just as with whole life insurance, term life insurance pays a death benefit to the policyholder’s beneficiaries. Typically, a term life insurance policy costs less than a whole life insurance policy.

Universal life insurance

Universal life insurance is a type of permanent life insurance. As with whole life insurance, universal life insurance provides lifetime coverage and includes a cash value element. However, the premium payments and death benefits differ from those of a whole life insurance policy.

While premiums for whole life insurance are fixed, a policyholder can increase or decrease premiums for universal life insurance. The same is true of the death benefit, which is fixed for whole insurance but can be changed for universal life insurance.

Whole life insurance in a nutshell

As its name suggests, whole life insurance covers a policyholder’s whole life as long as the policyholder keeps up with premium payments. Key features of whole life insurance include a death benefit paid to beneficiaries and a savings component known as cash value. Because whole life insurance provides lifetime coverage, it generally costs more than other types of life insurance.

When you think about how your family would handle financial matters following your death, you might consider looking into whole life insurance as a way to potentially ease their financial burdens.

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