Whole life insurance explained

Our recommendation

You should consider whole life insurance if:

• You want lifetime coverage. If you are looking for a policy that provides lifelong coverage with a guaranteed death benefit, whole life insurance is a good fit. It’s ideal for those who want to ensure their loved ones are financially protected no matter when they pass away.
• You want cash value accumulation. Whole life insurance builds cash value over time, which can be borrowed against or withdrawn for various financial needs. If you’re looking for a policy that offers both protection and a way to build a financial asset, whole life insurance can serve dual purposes.
• You have a high net worth. For those with substantial estates, whole life insurance can be a strategic tool for estate planning. The death benefit can help cover estate taxes, ensuring that your heirs receive the maximum inheritance.

You likely don’t need whole life insurance coverage if: 

• You’re on a budget. Whole life insurance premiums are significantly higher than those for term life insurance. If affordability is a primary concern, term life insurance a better option. 
• You only need coverage for a specific period of time. If you only need to cover specific financial obligations that will diminish over time, such as a mortgage or your children’s education, term life insurance is a better option. It offers coverage during your peak earning years when your financial responsibilities are highest.
• You’re seeking high returns from your investments. While whole life insurance offers the benefit of cash value accumulation, the returns are typically modest compared to other investment vehicles. If your goal is to maximize investment returns, consider other options like mutual funds, stocks, or retirement accounts.
• You’re close to retirement. If you’re approaching retirement and have adequate savings and retirement plans in place, it may be more beneficial to focus on managing and enjoying your retirement funds rather than purchasing a new whole life insurance policy.

Whole life insurance can be a valuable financial tool, but it’s not one-size-fits-all. Carefully consider your financial situation, long-term goals, and the needs of your beneficiaries before purchasing a policy. 

What is whole life insurance?

Whole life insurance is a type of permanent life insurance. With most whole life insurance plans, your premiums remain the same as long you keep the policy.

It’s a strong selling point for some people looking for life insurance: You get one policy, and that’s all you need to buy for the rest of your life. Whole life plans have two distinct parts:

• The death benefit.
• Cash value that grows over time and can be accessed while you're alive.

How much is the average cost of whole life insurance?

"The general rule of thumb is that you pay $100 per month for every $100,000 of coverage if you are a healthy individual up until around your 40s," says David P. Drea, a financial adviser with Morgan Stanley.

Whole life insurance cost is usually higher than term life. Rates can vary quite a bit and are difficult to estimate without requesting personal quotes.

Rates for all types of insurance, including whole life, increase the older you are when you apply. If you want to buy life insurance, don’t wait.

The top five whole life insurance companies

There are dozens of life insurance companies providing different plans and policies. It’s important to find the best one for your needs.

According to J.D. Power’s 2022 survey, these are the top five life insurance companies:

• State Farm
• Nationwide
• MassMutual
• Mutual of Omaha
• MetLife

Whole life insurance that builds cash value

Whole life insurance has both a face value and a cash value. The policy's face value is what your beneficiaries receive when you die. So, if you have a $500,000 policy, they'll receive $500,000 at your death.

The cash value is the amount that accumulates in a tax-deferred account. You'll receive interest on the amount, growing the funds further. And if you go with a mutual life insurance company, you may also receive dividends. That's because having a policy with a mutual life insurance company means you own a part of the company and can share in the profits as an annual dividend payout.

It's important to know that when your beneficiaries file a life insurance claim, they will not receive the contents of the cash account. It's meant to be used during your lifetime.

How does whole life insurance cash value work?

These are several ways you can access and use the cash value of your policy:

• Borrow against it. If you're cash-strapped, loan yourself the amount from your cash value account. There’s no credit check or collateral to worry about. But if you've taken out a loan that hasn't been paid back by the time you die, your beneficiaries will be paid a lower death benefit.
• Surrender the whole life insurance policy for its cash value. You can cash out to use the funds for an emergency, but you'll be giving up the death benefit portion of the policy.
• Add an accelerated death benefit rider. In most cases, the rider is free or low-cost. If you become terminally or chronically ill, you can use the cash value funds to pay for your medical and living expenses.
• Use it to cover your premiums. If you have a sizable balance, you can stop paying your premiums and have them deducted from your cash value instead. Tell your insurer you're "paid up" and ask them to deduct the annual premiums from your cash value account.
• Ask your insurer to transfer the cash value to the death benefit. An insurer isn't obligated to do it, but they would agree to keep your business in most cases. Ask them to increase your policy's death benefit from the current amount of your cash value account. You'll transfer the cash value, which would go to the insurer when you die, to your loved ones.

Does whole life insurance require a medical exam?

Whole life insurance plans usually require a medical exam to determine the policyholder's health as part of the underwriting process. This can be as straightforward as a standard physical.

Depending on the results, an insurer may reject your insurance application or ask you to pay higher premiums. Health issues like diabetes, heart disease, and respiratory issues can flag your application.

If you have a condition that doesn’t allow you to get standard whole life, you can look into guaranteed issue life insurance. The premiums are higher because there are no exams or questions asked. A simplified issue policy is an option that requires no exam but does have a health questionnaire.

Should you buy term or whole life insurance?

Many experts argue that whole life insurance isn’t worth the cost due to the higher premiums compared to term life and suggest getting a term life policy and investing the additional money in other ways.

Whole life may still be the better choice for you, but it depends on your financial situation and other investments you have made. It’s best to get solid financial advice for your specific situation.

If you're still unsure, remember that many term life insurance policies offer a conversion feature. This option will allow you to change the term life policy to a permanent life policy at the end of the term. Some policies even allow you to credit some of the term premiums you've already paid toward your permanent life insurance policy.

How is whole life insurance different from term life insurance?

"Term life insurance is compared to renting, and a whole life policy is compared to owning,” says Carrie Skogsberg, senior public relations specialist at COUNTRY Financial.

You won't get back the premiums you paid for a term life policy if you outlive it. It’s similar to renting in that you pay for the ability to stay in the apartment for a certain number of years. It’s not your dwelling; once you return the keys, you have no further stake in the place.

By contrast, whole life insurance remains in place for your entire life as long as you keep paying your premiums. There is no end to the policy until the death of the policyholder.

The added benefit of a whole life policy is accessing the policy’s cash value. Over the policy's life, you can withdraw cash to pay for things you need or take a loan against it. Your policy will usually increase in value thanks to a fixed interest rate.