Whole Life Insurance

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Andrew Lee is insurance content writer and editor for BudgetMethod.com. Andrew holds a Bachelor's degree from Ryerson University and has extensive experience of writing content for financial websites. His expertise is especially strong in home and auto insurance.

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Whole life insurance is a kind of permanent life insurance. This means that the policyholder will have the policy for life. This is in contrast with term life insurance. Term life insurance only lasts for a specific amount of time, generally up to thirty years. Whole life insurance provides coverage in case of the policyholder’s death. When the policyholder dies, the death benefit is paid to the beneficiaries. An important part of whole life insurance is that it also builds cash value with a built-in savings account.

Whole Life Insurance Premiums & Factors That Affect Them

Premiums are what you pay monthly, yearly, or in a lump sum for your policy. One of the benefits of whole life insurance is fixed premiums. Premiums will remain constant throughout the life of the policy. In comparison, term life insurance premiums rise with the age of the insured.

Several factors determine what the fixed price of the premium will be. The first factor is the coverage. How much coverage do you want to purchase? Do you want to purchase just enough to pay for after-death expenses, or do you want to purchase enough life insurance to cover your salary for a certain period? And how much can you afford to pay? The insurer will also look at factors like health history, health risks, cigarette and alcohol use, driving record, criminal record, and any dangerous hobbies to come up with the premium price.

Whole life insurance policy premiums are typically much higher in price than term life insurance premiums, because the policies offer cash value. If both a term life insurance policy and a whole life insurance policy were active for the same length of time, about as many years as an ordinary person’s life expectancy, the cost would be about the same. However, term life insurance lasts on average only 10-15 years.

Death Benefit

The death benefit is the amount that is paid out to the beneficiaries after the death of the policyholder. The death benefit is fixed at the time of policy purchase. If there is an unsettled loan on the cash value that will be taken from the death benefit before it is dispersed. Beneficiaries do not have to pay taxes on death benefits.

Whole Life Insurance Cash Value

When the premium is paid, a percentage goes to a cash value savings account. The cash value account earns interest at a guaranteed percentage each year. The guaranteed growth means that regardless of the fluctuations from the stock market, the cash value will increase by the agreed percentage. The policyholder can also receive dividends from the insurer each year. Dividends can be used to buy additional insurance, increase cash value, or increase the death benefit. The cash value is tax-free. After the policyholder’s death, the remaining cash value is absorbed by the insurance company. The cash value is beneficial because it acts as equity for the policyholder.

Accessing the Cash Value

There are a few ways that you can use the cash value portion of your policy.

  • Loan — You can opt to take out a loan against the money that you have accumulated in your cash value. The loan amount can be up to the amount in your cash value. Payments will include interest. If the policyholder dies before the loan is paid off, the loan and interest will be withdrawn from the death benefit.
  • Withdrawal — Some companies will allow you to withdraw portions of the cash value accumulated in the account. The amount that can be withdrawn is at maximum, the total amount of premiums paid. However, there are usually fees associated with withdrawal.
  • Premium payment — Depending on the rules of the insurer, after a certain period of time, the cash value accumulated can be used for premium payments.
  • Surrender — If the policyholder decides to cancel the policy, they can surrender it. If the policy is over two years old, the insurer will turn the cash value over to the policyholder. In this instance, the cash value will be counted as income and taxed.

The cash value does not transfer to beneficiaries. When the policyholder dies, the cash value returns to the company. The cash value can only be used while the policyholder is still alive.

Whole Life Insurance Riders

Riders are extra benefits that you can add on to your whole life insurance policy, also called endorsements. Riders are optional add-ons that customize the life insurance to meet the needs of the policyholder. Riders can be purchased for several things. Some riders add coverage options for spouses or children to the policy. Some riders are added to allow access to the policy funds in the event of an accident, disability, or terminal illness. Riders are not necessary for everyone but can be helpful in many situations.

What if You Change Your Mind?

What if you purchased a life insurance policy and decide that it is not the right policy, can you change it? Some insurers have a conversion option. If you have a whole life insurance policy, you can sometimes use the cash value of the policy to change over to a term policy. The cash value of the account will determine the length of the term life policy and the amount. If you have a term life insurance policy, within a certain deadline, you may be able to change your policy to a whole life insurance policy.

Is Whole Life Insurance Worth It? Pros and Cons

After you die, you want to make sure that your loved ones are provided for. That is the main reason for life insurance. Whole life insurance gives your beneficiaries a monetary benefit, but it also can be used while you are alive as a cash asset. When researching, you will often find that many sources recommend purchasing term life insurance policies over whole life insurance policies. These are the advantages and disadvantages of whole life insurance.


  • Whole life insurance policy is permanent life insurance because it provides lifetime coverage. This means that as long as payments are current and the policyholder is still living, the policy will not expire. Term life insurance only lasts for a specified number of years.
  • Whole life insurance has fixed premiums. You will always know how much your payments will be. They will not rise over time, unlike other policies.
  • There is a fixed death benefit. The death benefit amount is guaranteed.
  • Whole life insurance has a built-in savings account. Each premium payment is divided. One part of the premium pays the fees. The other part adds money to the cash value account.
  • The cash value has a guaranteed yearly growth rate. Interest is set at a fixed rate and is not contingent on the stock market.
  • The cash value is a living benefit that can be used as equity, utilized by withdrawal or loan, or applied to pay premiums.


  • Whole life insurance is expensive! It can end up being up to ten times more expensive than term life insurance.
  • It may take years before you have access to the cash value. It can take a decade (that is ten whole years!) of payments before you start seeing a positive return. That means it could be fifteen years before you have accumulated enough money to take out a loan on your policy.
  • Getting the money that you have put in is not always easy, and it involves fees! If you decide to withdraw money, there are fees. If you decide to take a loan out on the cash value, you will pay interest. If you surrender the policy, you will pay a penalty out of the cash value that you receive in exchange.
  • Whole life insurance isn’t the best investment choice. If you are purchasing this policy solely for the investment benefits, this policy probably shouldn’t be the top choice. First, it is always a good idea to diversify your investments. All of the money you are investing in this policy goes to one company. This puts you at risk because all of your money is in one pot.
  • Whole life insurance is not as flexible as other plans. Although the premium stays fixed, the premium payment is still a lot higher than term life insurance premiums. Will you be able to afford the high premiums month after month and year after year? What happens if you can’t pay the premiums for one month? If you cannot pay the premiums, the policy will lapse. If the policy lapses, you may be forced to surrender the policy. This means that you will have to pay surrender fees and will end up being taxed on the cash value.

To Sum It All Up

Whole life insurance includes both a death benefit and a cash value savings component. This is a good option if you want lifelong coverage, can pay higher premiums, want both fixed premium rates and a fixed death benefit rate, have long-term dependents who need trust, and want to build cash value within your life insurance policy. If you are only looking for life insurance to only cover a specific amount of time, term life insurance might be a better option.