Whole life insurance is a type of permanent life insurance that can provide coverage for life. provides a variety of guarantees, which may be attractive to someone who doesn’t want the guesswork after buying life insurance.
Whole life insurance combines an investment account called “cash value” and an insurance product. As long as you pay the premiums, your beneficiaries can claim the policy’s death benefit when you die.
what is whole life insurance?
Whole life insurance offers coverage for the rest of your life and includes a cash value component that allows you to take advantage of it while you’re alive.
Whole life insurance offers three types of guarantees:
- a guaranteed minimum rate of return on cash value
- a promise that your premium payments will not increase
- a guaranteed death benefit amount
Whole life insurance is more expensive than term life insurance because people with a whole life policy are guaranteed a death benefit when they die. Term life insurance, on the other hand, offers flat rates for a specified period, such as 20 or 30 years. term life policies are cheaper than whole life insurance because they only offer coverage, not cash value.
How does whole life insurance work?
Whole life insurance works by first selecting the amount of coverage that best suits your needs. Once you have a policy, whole life insurance can stay in force for your entire life, as long as you continue to pay premiums. plus, a cash value component will build over time.
cash value accumulation in whole life insurance
Part of the permanent life insurance premium payments will accumulate in a cash value account, which grows over time and can be accessed with a policy loan, withdrawal, or policy surrender.
Similar to a 401(k) or IRA, the money in the cash value account grows tax-free. however, if you withdraw cash value that includes investment earnings, that portion will be taxable.
Cash value accumulation is the main differentiator between permanent life insurance and term life insurance. While actual growth varies by policy, some policies take decades before the accumulated cash value exceeds the amount of premiums paid. This is because the entire premium does not go towards the cash value, only a small portion. the rest goes to pay for insurance and expenses.
Most whole life policies have a guaranteed rate of return at a low percentage, but it’s impossible to know how much your cash value will actually increase. That’s because most insurance companies that sell whole life also offer a “non-guaranteed” rate of return based on dividends. You can choose to apply your dividends to the cash value each year, but you can’t know how much it will grow to over time.
It can take decades for the policyholder’s cash value to exceed what is paid in premiums.
using cash value in whole life insurance
You can take advantage of the cash value with a withdrawal or a loan, or when you surrender the policy. If you take out a loan, it is tax-free and you can pay it back with interest. There are no taxes as long as your withdrawal is less than the part of your cash value that is attributed to the premiums you have paid. if your withdrawal is more, you will owe taxes on the difference because they are investment earnings.
Outstanding loans and withdrawals will reduce the amount of the death benefit that is paid if you die. that’s not necessarily a bad thing. After all, one of the reasons to buy a whole life insurance policy is to get cash value, so why leave the money sitting around unused?
You want to be sure you understand all the ramifications of accessing cash value before you make any decisions.
death benefit and beneficiary selection
When you purchase a policy, you choose a life insurance beneficiary to receive the death benefit. you do not have to divide the payment equally among the beneficiaries. You can designate the percentage for each, such as 75% for Mary and 25% for John.
It’s also a good idea to designate one or more eventual beneficiaries. these people are like your backup plan in case all primary beneficiaries are dead when you die.
Designating beneficiaries is an important task, as is keeping your designation up to date with your wishes. The life insurance company is contractually obligated to pay the beneficiaries named in the policy, regardless of what your will says. it is advisable to check once a year to verify that your beneficiaries still reflect your wishes.
what happens when you die
A major selling point of permanent life insurance is that it is in effect until your death, provided you have paid the required premiums.
But here’s a catch: For most policies, the policy pays only the death benefit, no matter how much cash value you’ve built up. Upon your death, the cash value reverts to the insurance company. And remember that outstanding loans and prior cash value withdrawals will reduce the payment to your beneficiaries.
Some policies allow you to purchase a rider that provides your beneficiaries with both the death benefit and the accumulated cash value. this provision also means you will pay higher annual premiums, since the insurance company is committed to a higher payment.
how much does whole life insurance cost?
While some of the cash value features and permanent nature of whole life insurance sound appealing, whole life insurance is simply unaffordable for many people.
Many life insurance shoppers compare the costs of term life insurance to whole life insurance. it is never an apples to apples comparison because the policies are so different. With that said, here are sample whole life insurance quotes based on a 30-year-old man of average height and weight for $500,000 in coverage.
This cost differential makes whole life insurance much less attractive to many people who need insurance.
here is a life insurance calculator to help you determine your need for life insurance.
factors affecting whole life insurance premiums
The amount of coverage you choose will help determine your rate, along with:
- age and gender
- height and weight
- past and current health conditions
- health history of your parents and siblings
- nicotine and marijuana use, including nicotine patches and gum
- substance abuse
- criminal record
- driving record (especially DUI convictions and moving violations like speeding tickets)
- hobbies and dangerous activities (like flying planes or rock climbing)
With whole life insurance, there are a variety of other features and provisions that can also affect costs, such as:
- Payment Period: You can choose to pay off the entire policy over a short period of time, such as 10 or 20 years. the premium would increase substantially given the anticipated burden of payments.
- guaranteed return rate: some companies offer a higher guaranteed return, which can result in higher annual premiums.
- Dividend crediting: Many whole life policies pay a dividend and policyholders can choose how to receive it. receiving your dividend payments as a premium credit reduces your annual outlay.
options to waive whole life insurance
With term life insurance, if you no longer need insurance, you can simply stop paying. once you stop, the policy expires and the insurance company will no longer pay any benefits if you die.
Whole life insurance isn’t that simple. if you stop paying, the cash value will be used to pay premiums until the cash value is depleted and the policy expires. but there are alternatives to simply suspending payments.
Options vary depending on your plan, but may include the following tactics.
take cash surrender value
You can simply request that the surrender value be paid to you in cash. this is the cash value less any surrender charges. this action terminates the insurance policy, so you should only do this if you no longer need insurance or have new insurance in force.
When you take the surrender value, you will have to pay income taxes on any investment gains that were part of the cash value.
ask about reduced paid-up life insurance
If you want a paid policy with a lower death benefit, the life insurance company takes what you’ve already paid, calculates the amount of death benefit it would provide, and gives you a policy with the lower death benefit. benefit amount. this avoids any taxes and leaves you with life insurance still in force.
long term life insurance
The life insurance company takes what you already paid and converts the policy to a term life policy for the same death benefit. The length of the policy depends on how much you paid, how old you are, and the company’s current rates for a policy of that size and length. this is useful for someone who wants to keep some life insurance for a short period of time, but no longer needs whole life insurance.
You can change your policy to a different life insurance policy or to an annuity. this may make sense to avoid taxes on the surrender value or if you realize that another whole life policy has substantially better features and you prefer to have that policy instead.
when does life make sense?
Given the cost of whole life insurance and the fact that many people do not need insurance for their entire lives, it is often not the ideal product to purchase. however, there are some specific situations where it makes sense to purchase some type of permanent life insurance. And you may find that a universal life insurance policy is more affordable if lifetime coverage is your primary goal.
fund a trust: Permanent life insurance can be used to fund a trust that will support the children after your death.
paying estate taxes: For those with estates greater than the current estate tax exemption, which is $12.06 million in 2022, permanent life insurance may make sense to help heirs pay estate taxes after you die. some states have lower tax limits, so it may make sense for people who live in those states as well.
Financing a buy-sell agreement: If you own a business with a partner, you may want to consider whole life insurance to finance the purchase of the other’s shares in the business upon your death .
the best sellers in whole life insurance
Below are the largest sellers of whole life insurance, in alphabetical order. The list is based on annualized premiums for 2020, according to Limra, a financial services industry research group.
- crib mutual
- gerber life insurance co.
- guardian life insurance co. of america
- massmutual life insurance co.
- mutual of omaha cos.
- new york life
- northwestern mutual
- oneamerica financial
- penn mutual
- state farm life
whole life vs term life vs universal insurance
The key differences between permanent life insurance, term life insurance, and universal life insurance are the duration of coverage, the ability to build cash value, and the flexibility of premiums and the death benefit. .
what is the difference between term life insurance, whole life and universal life?
Term life insurance is good for people who want a financial safety net for a specific number of years of work, such as mortgage payoff years. secures level premiums for the length of the term, such as 10, 15, 20, or 30 years. a small number of companies even offer 35 and 40 year term life insurance. no cash value.
Whole life insurance is good for people who want lifetime coverage, premiums that don’t change, and a cash value component. Your beneficiary will receive a life insurance payment no matter when you die, as long as he has paid the necessary premiums to keep the policy in force.
Universal life insurance is another type of permanent life insurance. could be a good option if you want the ability to build on the policy’s cash value and the flexibility to adjust premium payments and death benefits as your needs change.
related: types of life insurance
is whole life insurance worth it?
Here are questions and options to help you decide if whole life insurance is right for you.
- Do you need life insurance for 30+ years?
- Do you need cash value?
- Do you want flexibility with payments or payment amount?
- Do you need a payment when you die, or only after both you and your spouse die?
whole life insurance is a product that has some uses, but it’s not for everyone. The added benefits of whole life insurance can often be found by using your investment and retirement accounts for profit, in combination with a term life insurance policy.
Before purchasing any insurance policy, make sure you fully understand the options available and the various provisions of the policies.
whole life insurance alternatives
Whole life insurance is just one type of permanent life insurance. Other types of permanent life insurance work quite differently than traditional whole life insurance. other options include:
- universal life insurance
- variable life insurance
- survivor life insurance
- burial insurance
life insurance market share
whole life makes up a third of the individual life insurance market as measured by premiums paid, according to limra, an industry-funded research group.