What is Whole Life Insurance?

Read time: ~9 minutes

As we get older, we begin to wonder what legacy we’ll leave behind. What can we do to help ensure that our loved ones are taken care of long after we’re gone? Setting your family up for a secure future starts with understanding whole life insurance.

If that’s on your mind, then you must have thought of buying life insurance or at least tried to determine your life insurance needs. Many American adults understand the impact of this coverage. According to Statista, in 2023, 52% of Americans owned life insurance.

In this article, we’ll walk you through some important points to help you build an understanding of whole life insurance, so you can decide if it is the right fit for you.

In this article:

What are the most common types of life insurance?

Whole life insurance policies typically consist of two main components: the death benefit and the cash value. The death benefit is the lump sum paid to the beneficiaries upon the policyholder's death.

The cash value is the savings component of the policy, which grows tax-deferred over time. As a policyholder, you can access the cash value through withdrawals or loans. This can provide you with much-needed flexibility and financial security.

Most whole life policies have a level premium, which means you pay the same amount throughout the policy's term. One exception is a modified whole-life policy. Given that whole life insurance accumulates cash value over time, it is both a protection plan and an investment vehicle.

Major benefits of whole life insurance

So what is a whole life insurance policy?

• Whole Life Insurance is permanent: This means that the coverage you get with whole life insurance will be in effect for as long as premiums are paid. Unlike term life insurance, which can cover you for a specific time period, a whole life policy can last a lifetime.
• You pay a predictable premium: You pay a predictable premium for life. The premium amount also known as level premium, is fixed at the time of issue. It is guaranteed to remain the same throughout the contract unless you choose a non-level premium.
• It can provide cash for other needs: Whole life insurance policies build cash value, much like the equity in your home. As you pay your premiums, they can grow tax-deferred over time.
• Premiums are based on age and health: This means that whole life insurance may never be cheaper than it is right now. However, in the early years of coverage, it can also mean that a term life policy has lower monthly premiums. The difference is that when your term runs out and you need to reinsure coverage later in life, those premiums will likely increase. Because you always pay the same premium for whole life, your premiums are based on the age when you purchased the policy.

How does a whole life insurance policy work?

Whole life insurance works by providing lifelong coverage and accumulating cash value over time.

When you purchase a whole life insurance policy, you agree to pay a fixed premium for the duration of the policy. A portion of this premium goes towards the death benefit, while the remainder goes into the cash value account.

Over time, the cash value grows at a guaranteed rate, tax-deferred. Policyholders can access this cash value through withdrawals or loans, which can be used for various purposes, such as supplementing retirement income or covering unexpected expenses.

Additionally, the death benefit is paid out to the beneficiaries tax-free upon the policyholder's death, providing financial security for loved ones.

Types of whole life insurance

Whole life insurance comes in various forms to cater to different financial needs and preferences. Understanding the different types can help you make an informed decision when choosing a policy that aligns with your goals.

Traditional whole life insurance

This is the most straightforward form of whole life insurance. It provides a fixed or unchanged death benefit (which is determined at the time of policy issuance and remains fixed throughout the life of the policy), fixed premiums and cash value accumulation over time. The policyholder has the option to participate in the insurance company's dividends, which can enhance the cash value and death benefit.

Guaranteed issue whole life insurance

This whole life insurance is designed for individuals who may have difficulty obtaining traditional life insurance due to health issues since it typically doesn't require a medical exam. While this can be a convenient option, it often comes with higher premiums and lower coverage amounts.

How can whole life insurance help me?

Despite the many benefits, it’s important to understand why whole life insurance could be the right fit for you.

FAQs on whole life insurance

Now, let's address some frequently asked questions about whole life insurance to provide you with a more comprehensive understanding.

Is whole life insurance expensive?

Whole life insurance premiums increase with age, so the best time to purchase is now. The benefits are fixed which includes comprehensive coverage. Guaranteed benefits and potential cash value accumulation justify the cost for individuals seeking a long-term financial solution. Apply now for your best rate

How do whole life insurance policies provide flexibility?

Whole life insurance policies offer flexibility in various ways. The level premiums provide predictability, making it easier for individuals to plan and budget for the long term. Additionally, the cash value component adds a layer of flexibility, allowing policyholders to access funds through withdrawals or policy loans for various financial needs.

What is guaranteed cash value?

Guaranteed cash value refers to the minimum amount of cash value that a whole life insurance policy will accumulate over time. This value is guaranteed by the insurance company and provides policyholders with a predictable and stable investment option.