June 28, 2019

Is Whole Life Insurance Worth It

Read more about Life Insurance

Whole life insurance offers an investment and cash-value benefit in addition to financial security. But is the higher price tag and risk worth it?

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The primary purpose of life insurance is to provide for your loved ones when you pass away. The proceeds can

  • Offer financial security for your children or spouse
  • Pay off debts or a mortgage
  • Ease the burden of funeral expenses or medical costs

Read on to learn more about the benefits of whole life, one of the two main types of life insurance.

What Is Whole Life Insurance?

Whole life is a form of permanent life insurance that provides lifelong coverage (as long as you pay your premiums). It includes a cash value component that increases over time.

Your premiums are typically fixed for the life of the policy. A portion of that monthly payment goes towards the death benefit and another portion is contributed to the cash value account.

The cash value return grows at a guaranteed minimum interest rate set by the insurer. You can use it to take out loans against the policy throughout your life. If you choose to surrender your policy or end coverage, you will get the net cash value returned to you (minus a surrender charge).

The death benefit and the cash value are different. When you die, your beneficiaries will receive the death benefit, but the insurer will keep the cash value accumulation.

Should You Get Whole Life Insurance?

Here's who should consider a whole life policy:

  • Younger, wealthier families who want to help beneficiaries pay estate taxes.

  • Individuals with a higher source of income that can afford the premiums.

  • Parents of a child with a disability to use for continued caregiving expenses.

  • Individuals planning to spend their savings in retirement who still want to leave an inheritance for loved ones.

If you are in your 40s, 50s, or older, a whole life insurance policy may not be the best option. You likely won't have the policy long enough to see an investment return.

Whole life policies are one of the more expensive life insurance options. But you may find the pros outweigh the cons. Keep reading to find out.

Pros of Whole Life Insurance

  • Fixed Premiums
    Even as you age and your health status changes, you will not be required to pay a higher monthly premium. The premium remains fixed as long as the policy is active.

  • Guaranteed Investment Return
    You are guaranteed a return on the policy investment (cash value), though it is not a large return. Whole life cash accounts often pay around 5%–6% interest before fees.

  • Access to Cash Value
    You can normally withdraw the cash value at any time. These dollars can be allocated to emergency funds or other bills.

    If you stop paying premiums, any built-up cash value will be returned to you (minus a surrender charge).

  • Reduced Paid-Up Benefit
    If you decide you do not want to pay the policy any more, most insurance companies will offer a smaller policy that is already fully paid.

    For example, if you are paying for a $500,000 policy, you can choose to stop paying and keep a $250,000 death benefit (depending on when this is done) and never have to pay again.

  • Guaranteed Death Benefit
    Your beneficiary will receive the death benefit tax-free no matter when you die, as long as you've stayed current on your premium payments.

Cons of Whole Life Insurance

  • Expensive Monthly Premiums
    You may pay up to 10 times for a whole life policy. The insurance company takes on more risk since you will have the policy until you die (unlike term policies, where the policyholder almost always outlives the policy term).

    More than 20% of policy owners abandon or surrender their policy before the end of the third year due to the high monthly cost. Nearly 50% surrender within 10 years!

  • Slow Investment Return
    It could be more than 10 years before you see a return. That's due to the way policies are written, combined with the low interest return rate.

    If instead, you had invested on your own, you could see immediate return or higher return values.

  • It's Complex
    The cash value, fees, and interest portions make this type of policy difficult to understand.

  • High Fees
    You will pay high surrender fees (fees if you withdraw or take out a loan), agent commission, and administration fees in the first few years of your policy.

    It could 10 years or longer before your policy is mature enough to avoid the high surrender, commission, and administration fees.

Is Whole Life Insurance Worth It?

Follow these steps to determine whether whole life insurance is right for you.

  • Consider Your Life Insurance Needs
    Do you need lifelong coverage? Or will a term policy be sufficient?

  • Compare Quotes for Both Term and Whole Policies
    Determine whether or not you can afford monthly payments for a whole policy. When you see the premiums side-by-side, you may decide a whole policy isn't worth the extra cost.

  • Talk to a Financial Advisor/Life Insurance Agent
    A life insurance professional can provide recommendations and help you decide on a better investment option.

How to Access Your Cash Value

There are many things you can do with the cash value. It's similar to what you can do with traditional investments. For example, you can:

  • Increase the Death Benefit with Paid-up Additions
    Some insurance companies allow you to use your cash value to purchase extra insurance coverage.

    For example, a $500,000 policy can have a death benefit of $600,000 at no extra cost, simply because the cash value paid for it for you.

  • Take Out a Loan
    When you take out a loan against your policy, you are using the cash value as collateral against your loan. You can use the loan for anything, such as paying bills or buying a car or house.

    When you take out the loan, there are no additional underwriting requirements and there's no credit check. Most insurers simply require you to fill out and submit a form (often found on their website). It won't even appear on your credit report.

    You can keep the loan out for as long as you want, though there is interest charged by the insurer.

    If you pass away while the loan is outstanding, the value of the loan will be subtracted from the death benefit given to your beneficiaries.

  • Surrender Your Policy for Net Cash Value
    If you decide you no longer need your life insurance policy, you can surrender it and collect the net cash value. Just let your insurer know you want to surrender your policy, and they will pay you out.

    The net cash value may be lower than your accumulated cash value because some insurers charge surrender or other fees. However, the longer you have your policy in place—typically 10–15 years or more—the more time the net cash value has a chance to grow.

Factors Affecting Whole Life Prices

There are a number of factors that affect your policy monthly premium. But typically monthly premiums increase the older and unhealthier you are.

FactorPrice Effect
AgeThe younger you are, the less you are going to pay.
SexTypically women pay less than men.
HealthThe healthier you are, the less you'll pay.
Smoking habitsSmokers will pay more than non-smokers.
HobbiesRiskier hobbies/occupations increase prices.

When you apply for coverage, the insurance company will determine the risk they will take on by accepting your application and approving your policy purchase.

The higher your risk, the more likely it is that you will pass away before paying the full coverage amount, so the higher your monthly premium is.

The lower your risk, the more likely it is you will pay off your full coverage, so the lower your premium is.

Keep reading to see how much whole life insurance may cost you.

For a more exact quote suited to you, compare your own life insurance quotes by working with an insurance agent or checking online.

The basic information you provide during a quote can give you an idea of how much you will actually pay for a whole life policy.

Average Whole Policy Rates

In the charts below, find an average monthly cost for a whole life policy. They are sorted by male or female, and based on a generally healthy non-smoker.

Whole Life Insurance - Male


Whole Life Insurance - Female


Other Life Insurance Alternatives

If whole life insurance isn't right for you, there are other, and sometimes cheaper, options. Keep reading to learn more.

Term Life Insurance
The most popular type of policy, term life's simplicity and low premium rates are well-suited for just about anyone looking to purchase life insurance.

Term life is cheaper because it's temporary. The length of the policy, or term, generally only lasts 10, 20 or 30 years. In fact, most term policies don't actually give a payout because the majority of policyholders live to the end of the term.

You'll want to choose a term life policy if:

  • You only need life insurance to replace your income over a certain period, such as the years you're raising your children or have an outstanding mortgage.

  • You want a simpler, more affordable policy.

Universal Life Insurance
Universal life insurance provides a permanent death benefit and has added cash value. With universal life, the cash value grows based on the performance of the investments your insurer made on your behalf.

The opposite is also true—if the portfolio performs poorly, the growth will be lower.

Variable Life Insurance
Similar to universal life, with variable life insurance part of your premium is contributed to a cash account. The difference with variable life is that the cash value can be invested in a variety of different accounts, similar to mutual funds, and the choice of which accounts to invest in is up to you.

The cash value is not guaranteed, but may have a higher return than a whole life or universal life policy.

With variable life insurance policies, you can invest the cash value in investment options like stocks, bonds, equity funds, and money markets.

Guaranteed Issue Life Insurance
Guaranteed life insurance is as the name states—guaranteed. With no medical questions or exams, it was designed for people with serious medical conditions or who are very elderly, therefore likely disqualifying them from approval for other types of policies (like term or whole).

Guaranteed life is a permanent policy, which means it builds cash value and has guaranteed coverage. The downside is that while it costs less than whole life insurance, it's still more expensive than term life. The death benefit is also very low, usually maxing out around $25,000.

Guaranteed Life Issue coverage has a 2-year waiting period before the policy will pay a death benefit. If an insured passes away before that time, the premiums paid will be given to the beneficiary.

Bottom Line

A whole life policy generally costs more than other types of life insurance. But it offer specific benefits like permanent coverage, fixed premiums, and a cash value component.

While the coverage is well-suited for some people, whole life or other permanent forms of life insurance are not an ideal means of investment. If you are considering a whole policy specifically for the cash value growth component, talk to a financial advisor in addition to a life insurance agent to learn more about your options.

Unless you have specific needs that call for lifelong coverage, a term life insurance policy is probably a better fit.

Write to Caitlyn Callahan at feedback@creditdonkey.com. Follow us on Twitter and Facebook for our latest posts.

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