What Is Whole Life Insurance and How Does It Work?

family gathered around a loved ones hospital bed

What is whole life insurance? You’ve probably heard the term before, but that doesn’t mean you fully understand it. You’re not alone — many people are confused by whole life insurance and how it works. Here’s what you need to know before committing to a policy.

Table of Contents

What Is Whole Life Insurance?

Life insurance can help you reach your financial goals, and whole life insurance is a type of permanent life insurance. It provides coverage for the “whole” of your life. However, there are other types of permanent life insurance, like universal and variable life, with different features and benefits.

How Does Whole Life Insurance Work?

Whole life is the most common type of permanent life insurance. You pay a set premium each month, and the policy remains in effect for as long as you live. With whole life insurance, you can:

  • Borrow against your cash value
  • Withdraw funds from your account
  • Have a death benefit paid to your beneficiaries

However, the nuances make it more difficult to understand — many policyholders don’t take full advantage of the benefits and can overpay for coverage they don’t need.

Death Benefit

A whole life policy can pay a lump-sum death benefit to your beneficiaries. There aren’t restrictions on how the money is used. They may want to use it for funeral and burial costs, debt settlements or living expenses as they adjust to life without your income.

Cash Value

A portion of your premiums is set aside to build cash value. The insurance company invests the money, and the amount can grow over time.

Riders

Insurance riders are optional coverage that can modify the policy terms. For example, you may want to add an accelerated death benefit rider to access the death benefit amount while you’re still living if you’re diagnosed with a terminal illness.

How Much Does Whole Life Insurance Cost?

Many, many factors impact the cost of whole life insurance — age, gender, height and weight, medical history, family history, smoking and tobacco use, occupation and hobbies and other lifestyle factors. 

But one thing is certain: whole life costs significantly more than term life insurance. It’s tough to pin down a price for life insurance. It’s a complex calculation that depends on how different insurers evaluate your risk profile. 

Here’s a comparison chart to give you an idea of what to expect:

Gender/Age Typical Rates for $500,000 Whole Life Policy* $500,000 20-Year Term Life Policy from Everyday Life
35 female
$433 to $448/month
$18.70/month
35 male
$517 to $555/month
$21.05/month
45 female
$653 to $706/month
$39.33/month
45 male
$827 to $899/month
$49.37/month

* Based on quotes we obtained in March 2022 for an average, healthy, nonsmoking individual.

Pros and Cons of Whole Life Insurance

Whole life isn’t right for everyone. Here’s a look at the pros and cons of a policy.

Pros of Whole Life Insurance Cons of Whole Life Insurance
Last your entire life
Difficult to understand
Tax advantaged savings opportunity
More expensive than term
Ability to borrow against the policy
Increased risk due to lack of diversified cash value assets
Payout isn’t predictable
Often sold by salesmen (not fiduciaries)

What’s the Difference Between Whole Life vs. Term Life?

When shopping for life insurance, you’ll come across term life and whole life policies — those are the two main categories of life insurance. Term life provides coverage for a specific period of time, usually 10, 20, 30 or 40 years. The cost is much less expensive because the death benefit is only paid while the policy is active.

On the other hand, whole life insurance will last your entire life. The insurer will pay the death benefit whether you die young or live well into your golden years as long as your premiums are paid. However, whole life is much more costly than a term life policy.

Who Should Buy Whole Life Insurance?

Most people are better off buying a term life policy. They’re more affordable and offer valuable coverage during the most volatile years of life. Plus, they’re straightforward and easy to understand.

An end-of-life whole life policy can be a good option in some situations — for example, if you don’t have enough savings to cover funeral or burial expenses. The cost is generally less because the benefit amount is smaller. 

There’s one situation where you can confidently buy whole life coverage: You’ve maxed out all of your tax-advantaged investment options and still have more money left over that you don’t know what to do with.

Generally, whole life is difficult to navigate. And if you don’t understand what you’re buying, you probably shouldn’t buy it. 

If you’re looking for life insurance coverage, use The Ultimate Life Insurance Calculator to find the best policy for your situation.

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