What Is Whole Life Insurance and How Does It Work?

What Is Whole Life Insurance and How Does It Work?
What Is Whole Life Insurance and How Does It Work?

In the case of your death, a whole life insurance policy can assist safeguard your loved ones from financial ruin. We'll go over what whole life insurance is and the finest whole life insurance providers in this article. If you decide to go through with whole life, we'll point you in the direction of the greatest whole life insurance coverage for you and your family.

Whole life insurance definition

Term and whole life insurance are the two most common types of life insurance. It's helpful to compare whole and term life insurance characteristics to better comprehend the meaning of whole life insurance. Term life insurance, as the name suggests, lasts for a set number of years. The policy will terminate at the end of the term.

Whole life, on the other hand, is a long-term life insurance coverage. The policy remains active as long as the policyholder pays the premiums on time. Whole life insurance, unlike term insurance, has a cash value component. You can withdraw from the money that has collected when your policy has had time to accumulate cash.

How does whole life insurance work?

In six steps, this is how whole life insurance works:

  1. You submit an application for insurance. Depending on the firm and your preferred method, you can apply in person with an insurance representative or online.
  2. The insurer will investigate your background to see if you're insurable and, if so, how much your premiums will be. Here's a rundown of some of the things the insurance company will look into:

  • Age
  • Gender
  • Height and weight
  • Credit history
  • Criminal history
  • Nicotine use, including nicotine patches and gum
  • Your health history
  • Health history of your immediate family
  • Substance abuse
  • Driving record
  • Hobbies and activities that may be considered dangerous

3. When approved, you will be offered a rate quote. If you accept the quote, you'll sign insurance documents.

4. You make a premium payment and pay premiums at regular intervals to maintain coverage.

5. When the policy has accumulated enough cash value, you can begin to make withdrawals.

6. If you decide you don't need life insurance anymore (for example, if you've already saved and invested enough to provide for your family if you die), you can surrender the policy and receive a lump sum.

Whole life insurance features

Whole life insurance quotes are likely to be more expensive than term insurance rates, as we'll discuss here. The reason for this is due to the additional benefits that come with whole life insurance. While borrowing against life insurance is not allowed with most term policies, whole life policies allow policyholders to take out a policy loan and utilize the money as an emergency fund. It's worth noting, though, that building up enough capital to access the policy's cash value can take up to ten years.

Here are some of the additional benefits of whole life insurance:

Cash value accumulates with whole life insurance

Whole life insurance, in addition to providing a death benefit, allows policyholders to accumulate cash value. Like a 401(k) plan, the money accumulates tax-deferred. During their high-income years, a policyholder is not required to pay taxes on it. Instead, they pay taxes when they take money out of the bank.

Guaranteed rate of return

Meanwhile, whole life insurance firms provide a guaranteed rate of return on the policy's cash value. The average yearly rate of return on a whole life policy, according to Consumer Reports, is 1.5 percent. While this is a low rate, it outperforms many banking products, such as interest-bearing savings accounts and money market accounts (MMAs).

Guaranteed death benefit

A whole life insurance policy is a type of investment that pays out death payments. The death benefit chosen by the policyholder at the time of purchase will be paid to their estate as long as the policy is still in effect when the policyholder dies.

Whole life insurance pros and cons

Whole life insurance, like any other financial product, has advantages and disadvantages. The trick is to determine whether the benefits outweigh the disadvantages in your scenario.


  • Premiums are fixed for life.
  • The policy builds tax-deferred cash value at a guaranteed rate.
  • If the policyholder decides they no longer need life insurance, they can surrender the policy and receive any cash value it holds.
  • If the policyholder cannot make the payments, they can ask to receive the cash value and use those funds to catch up on the premium.


  • It can cost six to 10 times more than a term policy with the same death benefit.
  • If the policyholder allows coverage to lapse, the losses can be expensive.

Is whole life insurance worth it?

"Perhaps," is the answer. The entirety of your life may make sense depending on your circumstances. Assume you don't have an investment strategy and that paying your monthly whole life premium is the only way you'll be able to build an emergency fund or earn a guaranteed return. In that situation, it could be a good idea to check into getting your own whole life insurance policy.

Although whole life insurance is less confusing than other types of permanent insurance, such as universal life insurance, it is still more difficult to understand than term life insurance. Term life insurance is less expensive and easier to handle if you're happy to conduct your own investing and saving and your only purpose is to buy life insurance to protect your loved ones.

Whole life insurance are described as a "investment vehicle" by agents who offer them. However, when you compare the average guaranteed rate of a whole life policy to the average yearly return on the stock market, you'll quickly see how much money you're potentially squandering.

Let's imagine you're in the market for life insurance and can't decide between term and whole life. You're a 35-year-old man in good physical condition. A term life policy costs $600 per year, while a whole life policy costs $3,600 per year with the same death benefit.

There are two options available to you. You can pay $300 per month for a full life insurance policy and earn an average of 1.5 percent on the money you save. Alternatively, you may pay $50 per month for a term coverage and invest the remaining $250 in the stock market. The stock market, as you may be aware, rises and falls. Nonetheless, the annual average return on stock investments was 10.9 percent between 1971 and 2020.

Even if we adopt a more conservative estimate of 7%, it's clear that investing in the stock market will outperform settling for a low 1.5 percent rate of return in the long run.

Whole life insurance rates

Each of these quotations begins with a 35-year-old who has sought $300,000 in death benefit coverage to give you an idea of how history and lifestyle might affect costs.

Whole life insurance companies

Here are five reputable insurance providers to consider. While some of the benefits offered by each provider may overlap, finding the correct insurer begins with identifying which aspects are crucial to you.

Northwestern Mutual: Cash value is guaranteed to grow over time and can be used for anything.

MassMutual: Some policies offer the opportunity to earn dividends.

Globe Life: Benefits can never be cancelled or reduced.

State Farm: Premiums paid to 100.

Transamerica: As long as certain criteria are met, there's no need for a medical exam.

How whole life insurance compares to other types of life insurance

Comparing your options is always the key to smart shopping. Here's a quick look at how whole life differs from other types of life insurance.

Whole life vs. term insurance

A whole life policy can last the policyholder's entire life as long as the premiums are paid. Term life policies terminate at the end of its term. Term life insurance policies have no cash value, so if the policyholder does not die while the policy is active, they will have nothing to show for their years of premium payments (except peace of mind).

Whole life insurance policies build up cash value that can be used to make up for missed premium payments or as a rainy day fund. This money earns interest, which is usually around 1.5 percent each year.

Whole life insurance is far more costly than term life insurance. A 35-year-old woman in good health, for example, can get a $300,000 term life coverage for roughly $345 per year. A $300,000 whole life insurance policy would cost the same woman $3,190 per year in premiums.

Other types of permanent insurance

Permanent life insurance does not have to be whole life. Universal (or adjustable) life insurance, for example, provides more flexibility than traditional whole life insurance. Assume your job is going well and you're getting raises on a regular basis. After a few years, you realize you'll need extra insurance to compensate the loss of income if you die. With a universal life insurance policy, you can enhance the death benefit as long as you pass a medical exam.

A variable life insurance policy is another sort of permanent coverage. Variable life insurance combines regular life insurance's death benefit with an investment strategy. This policy allows the holder to invest in stocks, bonds, and money market mutual funds with monies accumulated in the savings account. Here's when it gets tricky: If your assets underperform, the cash value and death benefit of your insurance may be reduced.

Variable-universal life is a policy that combines universal and variable life plans. It enables the policyholder to make changes to their premiums and death benefit when their circumstances change, as well as to invest the monies that build in the policy.

Choosing the appropriate insurance policy is not a one-size-fits-all situation. What works for one individual may not work for someone else. If you're looking for insurance, the greatest suggestion is to conduct your research. Rather than relying just on what an agent or salesman says, learn everything you can about the insurance policy you're interested in to locate the best one for you and your circumstances.

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