Whole Life Insurance: Pros, Cons, and How It Works

Emily Guy Birken
Written by
Emily Guy Birken
Emily Guy Birken
Written by
Emily Guy Birken
Emily Guy Birken is a former educator, lifelong money nerd, and a Plutus Award-winning freelance writer who specializes in the scientific research behind irrational money behaviors. Her background in education allows her to make complex financial topics relatable and easily understood by the layperson. Her work has appeared on The Huffington Post, Business Insider, Kiplinger's, MSN Money, and The Washington Post online. She is the author of several books, including The 5 Years Before You Retire, End Financial Stress Now, and the brand new book Stacked: Your Super Serious Guide to Modern Money Management, written with Joe Saul-Sehy. Emily lives in Milwaukee with her family.
Katie Powers
Edited by
Katie Powers
Photo of an Insurify author
Edited by
Katie Powers
Insurance Writer
Katie Powers is an insurance writer at Insurify with a producer’s license for property and casualty insurance in Massachusetts and expertise in personal finance and auto insurance topics. She strives to help consumers make better financial decisions. Prior to joining Insurify, she completed her undergraduate and graduate degrees at Emerson College. Her work has been published in St. Louis Magazine, the Boston Globe, and elsewhere. Connect with Katie on LinkedIn.

Updated January 20, 2023

Reading time: 9 minutes

Why you can trust Insurify

As an independent agent and insurance comparison website, Insurify makes money through commissions from insurance companies. However, our expert insurance writers and editors operate independently of our insurance partners. Learn more.

Your whole life insurance policy is guaranteed to remain in place for the remainder of your life and will provide a payout to your loved ones even if you live to a ripe old age.

Whole life insurance can also provide a cash value to policyholders, making it a potential source of money for healthcare payments and other unexpected costs.

Here’s what you need to know about whole life insurance and how it works.

What is whole life insurance?

Whole life insurance provides a guaranteed death benefit to the policyholder’s beneficiaries regardless of how long the policyholder lives. Term life insurance, by contrast, only offers coverage for a set period of time, like 10, 20, or 30 years. With term life insurance, if you outlive the set term, your beneficiaries won’t receive a payout upon your death.[1]

Provided you make the agreed-upon payments to your life insurance company, whole life insurance guarantees you’ll be covered for your entire life. Whole life insurance offers a guaranteed payout, making it more expensive than term life insurance.

How does whole life insurance work?

When you purchase a whole life insurance policy, you’ll generally pay premium payments at regular intervals that don’t change. The premiums for whole life cost more than for a term life insurance policy for the same amount of coverage. For instance, a 40-year-old woman with a 30-year term life insurance policy for a $500,000 payout will pay a lower monthly premium than she would for a whole life insurance policy with the same payout.

A healthy 40-year-old policyholder has a relatively low risk of dying, but the risk increases as a person ages. The cost for a $500,000 term life insurance policy would also increase, making it harder for this policyholder to afford a new term life policy after the initial 30-year term expires for her at age 70.

Whole life insurance premiums start high to offset the higher cost of premiums later in life. But these higher premiums help build an accumulated cash value that you may access during your lifetime for long-term care, medical care, or even portions of premium payments.[2] 

The insurer will generally invest your cash value and may even guarantee a certain rate of interest over time. Some policies will allow you to take a loan against your cash value, although you’ll generally have to repay the loan with interest to ensure the death benefit remains the same.

Additionally, the accumulated cash value grows tax-deferred, meaning you’ll only owe taxes on the portion that represents investment gains or growth if you withdraw money from the cash value. Withdrawals from the portion of your cash value that came from your premium payments are tax-free.

When a whole life insurance policyholder dies, the insurance company pays the death benefit to the beneficiaries. If the policyholder previously took out a withdrawal or loan from the cash value prior to their death, the death benefit will generally not include the amount of the cash value withdrawal. 

For instance, let’s say a policyholder with a $500,000 whole life insurance policy took $100,000 from the cash value to pay for a stay in a nursing home. If the policyholder passes away without repaying the $100,000 to the cash value, the beneficiaries may only receive $400,000 as a death benefit.

Learn More: How Much Life Insurance Do I Need?

Types of permanent life insurance policies

Whole life insurance is just one of several types of permanent life insurance.[3] Here’s how each type of permanent life insurance works and what it offers:

  • Whole or ordinary life insurance: This is the most common type of permanent life insurance. Your premiums are fixed, and your beneficiaries will receive a guaranteed death benefit when you pass away, as long as you continue to pay the premiums. Whole life insurance generally offers a guaranteed growth on the cash value, as well as the potential for some nonguaranteed additional growth.

  • Universal life insurance: Also known as adjustable life insurance, universal life insurance policies offer some adjustability for policyholders. You may be able to increase the death benefit after passing a medical exam. And, once your cash value grows to a certain amount that covers the costs of your policy, you may be able to reduce your premiums.

  • Variable life insurance: This policy type gives you more control over how to invest the cash value. Policyholders can decide to put their cash value in stocks, bonds, money market accounts, or other investments. If the investments do well, the cash value that policyholders can access during their lifetime increases, along with a potential increase in the death benefit. But if you lose money on your investments, the cash value and the death benefit may decrease. However, some variable life insurance policies have a minimum guaranteed death benefit, no matter how your invested cash value performs.

  • Variable universal life insurance: Combining the adjustability of universal life and the investment control of variable life, this kind of policy allows you to adjust your premiums and death benefit and make your own investment choices. With this type of whole life insurance, you take on the potential rewards and risks of your investment choices, but you also have the option to reduce your premiums or increase your death benefit.

Also See: Types of Term Life Insurance

Pros and cons of whole life insurance

Whole life insurance works better for some people than others and may not be the right product for every life insurance shopper. Though this type of life insurance offers a guaranteed death benefit and a fixed premium for life, it costs much more than term life insurance. Whole life insurance offers you the potential to build cash value in a tax-deferred account to be used for unexpected expenses later in life. That said, loans and withdrawals from your cash value may decrease the death benefit.

It’s important to carefully consider all the benefits and drawbacks of whole life insurance to determine if it’s the right product for your life insurance needs.

Pros

  • Fixed premiums

  • Guaranteed death benefit for your entire life

  • Build tax-deferred cash value, generally at a guaranteed rate

  • Ability to withdraw cash value

  • Ability to take out a loan against your cash value without a credit check

Cons

  • Premiums cost much more than term life insurance premiums

  • Your coverage needs may decrease as you age and no longer have dependents counting on your income

  • Cash value growth is often slower than other types of investments

  • You’ll owe taxes on the growth portion of any cash value withdrawal

  • You must repay any loan with interest or risk reducing the death benefit

Whole life insurance vs. term life insurance

Term life insurance policies offer coverage for a much lower price than whole life because a term policy only provides a death benefit payment if you pass away during the term.

An affordable option for young parents, term life insurance helps parents ensure financial protection for their children or other dependents in the event of their death. Most children remain financially dependent on their parents for no more than 20 to 30 years, so term life policies will help take care of them if their parents die. 

Whole life insurance works well for parents of disabled children or other dependents with ongoing financial needs. People who simply want to leave their grown children and dependents a financial legacy may also choose a whole life insurance policy rather than a term policy.

In some cases, you can convert your term life insurance policy into a whole life policy. Most term policies are at least partially convertible, so you can decide to make your insurance permanent during the term. You may choose to do this due to changes in your health, your children’s needs, or your finances.

See More: Term Life vs. Whole Life Insurance: What’s the Difference?

Whole life insurance vs. universal life insurance

Policy flexibility marks the largest difference between whole and universal life insurance. A whole life insurance policy offers you a fixed death benefit and premiums. Universal life insurance, however, allows you to use your cash value to supplement or entirely pay for your premiums. Additionally, universal life may allow you to increase your death benefit after passing a medical exam.

Universal life insurance may present a better option for someone who wants a permanent policy with the flexibility to alter premium payments or adjust the death benefit amount. This could be helpful for someone worried about their ability to afford premium payments in retirement.

Best whole life insurance companies

Finding the right whole life insurance provider for you depends on what you need from your policy. Here are five of the best whole life insurance companies and what they have to offer.

State Farm: Best for customer satisfaction

State Farm values policyholder satisfaction, which explains why the company ranked highest in the J.D. Power 2022 U.S. Individual Life Insurance Study for Overall Customer Satisfaction.[4]

State Farm offers term, whole, and universal life insurance and currently holds an Insurify Composite score of 88 out of 100. The company provides excellent life insurance products and a great customer service experience.

Guardian Life: Best for variable income

Guardian Life offers term, whole, and universal life insurance options. This industry old-timer offers several options that ensure you can keep your life insurance even if your income decreases.

The company’s optional “waiver of premium” rider protects your whole life insurance in case you’re disabled or otherwise unable to work because of injury or illness. Alternatively, you can opt for a limited payment for your whole life insurance, with a level premium for a fixed period to guarantee you’ll be paid up prior to retirement or another decrease in income.

Guardian Life currently holds an A++ financial strength rating from A.M. Best.

MassMutual: Best for cash value growth

MassMutual has been offering life insurance and other financial products for more than 170 years, and the company expects to have a banner year for policyholder dividends in 2023. The company’s 6% dividend interest rate means policyholders will receive $1.9 billion in dividends this year.[5]

Buying a term or whole life insurance policy from MassMutual also allows customers to benefit from its wide range of financial products and affiliations with other financial institutions. MassMutual currently holds a financial strength rating of A++ from A.M. Best — making it another solid contender for your life insurance company.

Mutual of Omaha: Best for seniors

Because it offers life insurance and Medicare supplemental health insurance, Mutual of Omaha provides seniors with a great option for life insurance — especially considering people between 45 and 85 can purchase whole life insurance.

Mutual of Omaha currently holds an A+ financial strength rating from A.M. Best and an A+ rating from the Better Business Bureau.

Colonial Penn: Best for guaranteed acceptance

If you’re concerned about your ability to pass a medical exam, Colonial Penn offers guaranteed acceptance whole life insurance for people between the ages of 40 and 75. Furthermore, the company won’t cancel your coverage as long as you remain up to date on your payments. The company only offers a maximum benefit of $50,000.

Colonial Penn currently has an A+ rating from the Better Business Bureau and an A rating from A.M. Best.

See Also: 10 Best Life Insurance Companies

How to find the best whole life policy for you

Finding the best whole life insurance policy for your needs will require shopping around to compare multiple quotes from various companies before committing to buy a policy. Some of the factors you’ll want to consider during this process include:

  • The insurance company’s financial standing: You need a financially healthy and robust insurer to feel confident your beneficiaries will receive the death benefit.

  • Your beneficiaries’ financial needs: How much money your loved ones need in the event of your death may change over time.

  • Your budget: How will the cost of premiums fit into your finances now and in the future?

  • Your health: This could affect your ability to qualify for a policy, as well as the kind of policy you need.

See More: 10 Largest Life Insurance Companies

Whole life insurance FAQs

Choosing the right type of life insurance for your needs is an important financial decision. To help, here are some answers to commonly asked questions about life insurance.

  • Cash value from whole life insurance can be withdrawn or taken as a loan after reaching a certain value. This living benefit allows you to access money in case of an emergency or medical need.

  • Many life insurance providers require a medical exam for whole life insurance, but others don’t. However, insurers that offer guaranteed-acceptance whole life insurance policies generally have a relatively low maximum death benefit.

  • In exchange for fixed premiums, whole life insurance provides a guaranteed death benefit, even if you live into your 90s. This means your beneficiaries will receive a payout no matter how long you live. Additionally, whole life insurance also provides you with a cash value, which you have the right to access via a withdrawal or loan after it reaches a certain value.

  • Term life insurance and whole life insurance solve different problems.

    Term life insurance costs much less and offers a higher death benefit for the premium cost, making it a good option for someone whose loved ones financially depend on them for a certain period of time.

    Whole life insurance costs more and offers a lower death benefit for a higher premium cost. However, since it also accrues a cash value over time, whole life insurance provides a good option for someone who wants to leave a financial legacy and have access to the cash value during their lifetime. This means whole life insurance can work as both an estate- and retirement-planning tool.

Compare Life Insurance Quotes Instantly

  • Personalized quotes in 5 minutes or less
  • No signup required

Sources

  1. Insurance Information Institute. "Reasons to purchase permanent life insurance." Accessed January 17, 2023
  2. Insurance Information Institute. "What are the principal types of life insurance?." Accessed January 18, 2023
  3. Insurance Information Institute. "What are the different types of permanent life insurance policies?." Accessed January 18, 2023
  4. J.D. Power. "Both Life Insurance and Annuity Customer Satisfaction Decline as Pandemic Fears Wane, J.D. Power Finds." Accessed January 18, 2023
  5. MassMutual. "Record policyowner dividend announced by MassMutual." Accessed January 18, 2023
Emily Guy Birken
Written by
Emily Guy Birken
Linkedin

Emily Guy Birken is a former educator, lifelong money nerd, and a Plutus Award-winning freelance writer who specializes in the scientific research behind irrational money behaviors. Her background in education allows her to make complex financial topics relatable and easily understood by the layperson.

Her work has appeared on The Huffington Post, Business Insider, Kiplinger's, MSN Money, and The Washington Post online.

She is the author of several books, including The 5 Years Before You Retire, End Financial Stress Now, and the brand new book Stacked: Your Super Serious Guide to Modern Money Management, written with Joe Saul-Sehy.

Emily lives in Milwaukee with her family.

Learn More
Katie Powers
Edited by
Katie Powers
Linkedin

Insurance Writer

Photo of an Insurify author
Edited by
Katie Powers
Insurance Writer
Katie Powers is an insurance writer at Insurify with a producer’s license for property and casualty insurance in Massachusetts and expertise in personal finance and auto insurance topics. She strives to help consumers make better financial decisions. Prior to joining Insurify, she completed her undergraduate and graduate degrees at Emerson College. Her work has been published in St. Louis Magazine, the Boston Globe, and elsewhere. Connect with Katie on LinkedIn.