Updated October 17, 2019

What is Whole Life Insurance?

Read more about Life Insurance

Whole life insurance offers lifetime coverage and an investment component. But is it a good investment? And is it worth the price? Read on to find out.

What is Whole Life Insurance?

Whole life insurance, also known as permanent life insurance and ordinary life insurance, provides coverage for your entire life. Upon your death, it pays a death benefit to the beneficiaries named on the policy.

It also earns cash value, providing you with a savings vehicle that you can use while you're alive. This is similar to a savings account within the policy. The amount grows as premiums are paid and you can save, invest, or borrow from it as needed.

If you decide to terminate the policy, you get the cash value amount.

How Does A Whole Life Policy Work?

A whole life insurance policy provides coverage for as long as you're paying the premiums. Let's take a look at how a whole life insurance policy works by following its lifecycle:

  • Buying Coverage
    Once you determine your coverage amount and go through underwriting, your premium is finalized, and your policy is issued.

  • Paying the Premiums
    Pay the premiums according to the payment schedule, e.g., monthly, biannually, or annually. Part of the premium goes toward your death benefit, while part builds the cash value of your policy.

  • Invest or Save
    After two to three years of paying your premiums, your cash value begins earning interest, which you can invest or save. Depending on the type of your whole life policy, it may also pay you tax-free dividends.

    Is Whole Life Insurance a Good Investment?
    The returns on a whole life policy investment could be low compared to other long-term investments. However, if you have trouble committing to retirement savings, a whole life policy could be helpful.

  • Increase Coverage, Take Out Loan, etc.
    Make changes to your whole life policy as needed. You can increase the coverage as your family grows, take out a loan against its cash value to buy a car, or invest the savings to fund your retirement.

  • Payout
    Your whole life policy pays out the amount of coverage (i.e., death benefits) you originally purchased to your beneficiaries upon your death.

Types of Whole Life Insurance

There are four main types of whole life insurance:

Traditional Whole Life Insurance
Combines a death benefit with a savings feature. Choose a coverage amount and pay the applicable premium. The savings aspect comes from dividends paid out to you by the life insurance company.

Who Is It Good For: Those who already have a savings and investment plan elsewhere and would like to get some extra cash now and then.

Variable Life Insurance
This combines a death benefit with a savings feature, but you can invest the savings in stocks, money market mutual funds and bonds to grow the value of your policy.

However, if your stocks fall, the value of your policy and death benefit also decrease.

Who Is It Good For: Young people who want to invest for their future and can handle the risks of the stock market.

Some variable life insurance policies include a guaranteed minimum death benefit, so regardless of your investment, the value of your policy will not fall below this amount.

Universal Life Insurance
Also called adjustable life insurance, universal life is a more flexible type of policy. You can increase the death benefit during the life of the policy if you pass a medical exam.

It also includes a savings feature in the form of interest, usually at the money market rate. You have the option of using the accrued interest to lower your premium payments.

Who Is It Good For: Young couples who need coverage as their family grows or anyone who wants to save for the future without much active effort.

Variable Universal Life Insurance
This type combines aspects of variable life insurance with universal life insurance. You can change the amount of your death benefit, invest the savings, and lower your premium amount with the accrued earnings.

Who Is It Good For: Anyone looking for flexible life insurance and choices in how they can invest the savings.

What is Cash Value and Why Is It Important?
Cash value is the amount your policy is worth at any given time. As you pay your premiums, interest is earned on that amount.

Your policy cash value can be used for many things, including:

  • Loan collateral
  • Policy payments
  • Exchange to increase your death benefits
  • Retirement income

How Much Does A Whole Life Policy Cost?

Before buying whole life insurance, it's important to understand what you might be paying for coverage. Below we've gathered average whole life insurance rates for generally healthy, non-smoking men and women.

Whole Life Insurance - Male

Age$100,000$250,000$500,000$1,000,000
20$50.67$109.42$223.75$437.08
30$75.89$165.83$299.50$662.58
40$120.88$229.41$449.50$996.92
50$177.6$357.42$678.90$1,369.00
60$285.06$617.25$911.25$2,188.33
70$488.6$1150.41$2,176.75$4,848.67
80$897.17$2,211.09$4,650.83$6,797.50

Whole Life Insurance - Female

Age$100,000$250,000$500,000$1,000,000
20$43.08$96.00$197.75$385.25
30$72.09$134.25$293.23$576.17
40$101.33$232.00$438.75$877.16
50$157.67$335.17$685.5$1,300.50
60$241.92$540.58$986.08$2,121.73
70$414.75$1010.33$1,956.25$3908.15
80$736.05$1783.5$3,536.67$7339.01

Whole Life Insurance Companies

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While the insurance market may seem overcrowded with options, you'll likely find a good policy fit for your specific needs. We've compiled a few companies for you to consider below.

Best for Cash Value Options - Guardian Life

Guardian Life offers eight different whole life insurance models, giving policyholders the ability to customize how their policy accrues cash value. They also offer a variety of policy riders, including accelerated death benefit for long-term care, paid-up additions, and more.

A.M. Best rating: A++

Policy Offerings

  • L121: Higher death benefit, cheaper premium.
  • Ten Pay Whole Life: 10 annual payments with rapid cash accumulations.

Dividends

  • 2018 Percentage: 5.85%
  • 2018 Payout to Policyholders: $911 million

Best for Dividend Payments - MassMutual

MassMutual has consistently offered performance-based dividends to its policyholders since the 19th century. They typically pay 1-2 percentage points higher than competitors and their rates have been increasing year over year.

A.M Best rating: A++

Policy Offerings

  • Simplified Whole Life: No medical exam
  • Guaranteed Whole Life: Ages 50-75, up to $20,000

Dividends

  • 2018 Percentage: 6.4%
  • 2018 Payout to Policyholders: $1.6 billion

Best for No Medical Exam - Mutual of Omaha

Mutual of Omaha offers a policy for almost everyone, including some that don't require a medical exam. They offer a guaranteed coverage policy for those up to age 85, a higher limit than most other insurers.

A.M. Best rating: A+

Policy Offerings

  • Guaranteed+ Whole & Funeral Planning: Ages 45-85, $2,000 - $25,000 benefit
  • Whole Life Living Promise: Level or graded benefit, $2,000 - $40,000 plus accelerated benefits

Dividends

  • 2018 Percentage: 5.85%
  • 2018 Payout to Policyholders: $5.6 billion

Best for Seniors - Foresters

Foresters is an especially generous insurance option for senior policyholders. Their final expense policy provides lifetime coverage up to age 121, with guaranteed level premiums.

A.M. Best rating: A

Policy Offerings

  • PlanRight Whole Life: Up to age 121, level premiums, accidental death rider
  • Advantage Plus Participating Whole Life: Potential for dividends, additional term riders
  • Interest Sensitive Whole Life
    Good option for mortgage protection, estate planning, charitable giving or business safeguards.

Dividends

  • 2018 Percentage: 6.58%
  • 2018 Payout to Policyholders: $24.5 million

Where Do I Buy a Whole Life Insurance Policy?
First, check with your current health, auto, or home insurer to see if they also offer life insurance.

If you buy from an insurance agent, consider buying from an independent agent as opposed to a captive agent. Independent agents are less likely to push a certain policy or company just to meet sales quotas.

Whole Life Insurance Quotes Online

The process for buying a whole life insurance policy can often feel lengthy and complicated. Many companies still require you to speak with an agent just to get a quote.

Below, we've listed just a few companies that offer instant online quotes for a whole life policy. When shopping for coverage, be sure to get quotes from multiple companies to help you make a decision.

State Farm
State Farm boasts the highest possible ratings from both A.M. Best and JD Power.

Their whole life policy offerings include Limited Pay Life, which lets you pay premiums for– 10, 15, or 20 years. Their Single Premium Life policy lets you buy coverage in one single, lump sum. Get a whole life quote here.

AARP, with New York Life
AARP provides life insurance coverage through New York Life. They offer both term and whole life policies with no medical exam and guaranteed level premiums.

Keep in mind, however, that whole life coverage is capped at $50,000. If you already have a policy and want additional coverage, consider AARP's Life Insurance Program. Get a whole life quote here.

AIG
AIG has over 100 years in the life insurance industry and offers a variety of policy options. Their Guaranteed Issue Whole Life policy requires no medical exam and is guaranteed for individuals ages 50-85.

While they do offer instant online quotes, keep in mind that their underwriting typically takes 1-3 months. Be sure to plan accordingly when shopping for your whole life policy. Get a whole life quote here.

USAA
A great option for those in the military community, USAA offers whole life insurance with fixed premiums and guaranteed benefits.

USAA's Simplified Whole Life policy also gives you the option to increase your coverage following major life events such as marriage, buying a house, or having kids. Get a whole life quote here.

Cheap Whole Life Insurance

Many people avoid whole life insurance because it's typically a more expensive option than term life. However, getting a reasonably-priced whole life policy isn't impossible.

Here are some tips that may help you get a cheaper whole life policy:

  • Get insured at a young age
  • Maintain a healthy lifestyle
  • Undergo the full underwriting process (medical exam ,etc.)
  • Abstain from risky activities
  • Opt for a lower coverage amount
  • Find companies that cater to niche groups (smokers, diabetics, etc.)
  • Work with an independent agent instead of a captive agent

Which is Better, Term or Whole Life Insurance?
Term life provides coverage for a specific period of time, and whole life covers you for the rest of your life.

While they both provide coverage for your loved ones in the event of your death, only whole life can be utilized during your lifetime. Your whole life premiums build cash value that you can invest or save for later in life.

How Much Whole Life Insurance Should I Buy?

Whole life insurance is available in a wide range of amounts, from $10,000 to $1 million or more.

Since life insurance provides death benefits and replaces your income so loved ones can remain financially secure upon your death, you want to be sure you are purchasing sufficient coverage.

One way to calculate how much life insurance you should buy is to take your annual salary and multiply it by the number of years left until you retire.

You can also use the standard of living method to estimate how much life insurance coverage you should have. With this method, multiply by 20 the amount of money your loved ones would need to maintain their current standard of living when you're gone.

Another Option - Term Life Insurance

You can also purchase term life insurance, which provides death benefits for a specific period of time, such as 5, 10, or 20 years. When the term ends, so does your coverage.

There are different types of term life policies:

  • Level Term Insurance
    The most popular type of term life coverage; the death benefit does not change.

  • Decreasing Term Insurance
    The death benefit decreases, usually every year, over the term of the policy.

Should You Buy Term Life or Whole Life Insurance?
Term life insurance is ideal for people who only need limited coverage and cannot afford higher premiums.

Whole life insurance is better for people who want:

  • Life-long coverage
  • Both living and death benefits;
  • Additional funds to supplement their retirement savings;
  • The ability to borrow against the cash value;

Term Life vs Whole Life Insurance

Here are some of the pros and cons when comparing whole life and term life insurance.

The Cost

  • Term life is generally inexpensive. If you renew when the term ends, your premiums could cost you as much as a whole life policy.

  • Whole life is more expensive, as much as six to 10 times the cost of term insurance and ties up a fair amount of your monthly income for life.

The Investment

  • Term life offers no investment option. However, what you save in premiums could be invested elsewhere on your own.

  • Whole life has an investment vehicle built into it, but the returns could be low. However, it makes you save for the future.

Planning for the Future

  • With term life insurance, it's up to you to invest and plan for the future on your own time.

  • Whole life insurance provides steady investing through its savings component.

Tax Advantage

  • Term life has no savings feature, so if you choose to invest in your own 401(k) or IRA, you pay taxes when you withdraw the money during retirement.

  • With whole life insurance, the cash value of the policy grows tax-free. You only pay taxes if you withdraw more than what you paid into it.

Terms to Know

When looking into whole life insurance, you'll come across some terms you may not be familiar with. Below, we define some common terms associated with whole life insurance:

Policy owner: The person who buys and manages the life insurance policy. It may or may not be the same person whose life is insured.

Insured: The person whose life is covered under the policy. It may or may not be the same person listed as the policy owner.

Beneficiary: The person or persons who will receive your life insurance policy benefits when you die.

Death benefit: The money paid to the beneficiary after the policyholder dies.

Accelerated death benefit: A policy feature that lets you use your own death benefit if you are diagnosed with a terminal illness.

Premium: What you pay to keep your policy in effect. Fail to pay the premiums and your coverage will eventually be canceled.

Cash value: What your whole life policy is worth, based on how much you paid in premiums, as well as other factors.

Dividend: A feature of some whole life policies that pays policyholders a portion of the life insurance company's profits.

Rider: A separate contract you can add to your whole life policy for customized provisions, such as

Underwriting: The process that determines the premium amount for your coverage. Some underwriting factors are your

  • Health history
  • Life expectancy
  • Income
  • Lifestyle

Bottom Line

Whole life insurance is a type of life insurance coverage that also acts as a savings and investment vehicle.

While it is more expensive than term life insurance, it never expires as long as you keep paying the premiums. It also offers guaranteed benefits and ensures you are saving for the future.

Compare the various life insurance options to choose the coverage that meets your needs and the needs of your loved ones when you're gone.

Disclaimer: Opinions expressed here are author's alone. Please support CreditDonkey on our mission to help you make savvy decisions. Our free online service is made possible through financial relationships with some of the products and services mentioned on this site. We may receive compensation if you shop through links in our content.

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Term vs Whole Life Insurance


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