Whole Life Insurance Basics

If you’re looking for a life insurance policy to cover more than funeral expenses, whole life insurance might be a good option.

This fixed, permanent life insurance comes with cash value benefits and other nuances. Whole life insurance isn’t the best fit for everyone, but it can be a great advantage to some. If you’re shopping for life insurance quotes online, you should consider whole life insurance as an option.

We’ll take you through the whole life insurance basics you need to know to decide if this kind of policy is right for you.

What is whole life insurance?

Whole life insurance covers you for your entire life, provided you actively pay your premiums. A whole life insurance policy includes a guaranteed death benefit and a savings component to accumulate interest.

With whole life insurance, your death benefit will pay for your funeral costs, unpaid debts, and living expenses for your beneficiaries. The savings portion, or accumulated cash value, is a living benefit. You can withdraw or borrow from the cash value portion tax-free before your death.

Traditional whole life insurance has fixed premiums, meaning you’ll pay the same amount each month for your policy forever. Modified whole life insurance policies may allow you to begin smaller payments for a set term.

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How Whole Life Insurance Works

With both a death benefit and cash value in play, understanding how whole life insurance works can get complicated. Add in tax-free withdrawals or borrowing against your cash value, and things get even more complicated. There are also different subclass categories of whole life insurance to consider.

We’ll explain how whole life insurance works step-by-step, from understanding premiums and benefits to guaranteeing a payout upon your death.

Whole Life Insurance Premiums and Benefits

When you purchase a whole life insurance policy, you immediately agree to three fixed amounts: 

• A fixed monthly rate
• A guaranteed death benefit
• A cash value amount guaranteed to increase at a set rate

Insurers carefully calculate these amounts so that your cash value equals your policy’s face value as you reach a specific age. For most, that age is 100 or 121. If your insurance hasn’t paid out the death benefit by then, they’ll offer a policy extension or its cash value.

Essentially, your accumulated cash value offsets the cost of paying your death benefit to the insurance company. Once you have “paid back” your death benefit, they return the payout to you.

Your whole life insurance company will never pay out more than the face amount of the policy. Either your beneficiaries will receive the death benefit, or you will receive the cash value at age 100 or 121.

Using Your Accumulated Cash Value 

The cash value on your whole life insurance policy doesn’t just sit there. You can withdraw or borrow from the cash value to pay for large expenses or invest and return the money to increase its value further.

Most whole life insurance policies take several years to accrue meaningful cash value, so it’s wise to think of it as a long-term investment strategy. Once you have sufficient cash value, you can do the following:

• Use the cash value amount to pay your premiums
• Make tax-free withdrawals up to the amount you’ve paid in premiums
• Borrow from the cash value with no use restrictions but with interest
• Surrender the policy for the current cash value

Any action that permanently reduces your cash value, like making a withdrawal, will also reduce your beneficiaries’ final death benefit payout. Remember this when using the cash value.

How much does whole life insurance cost? 

We’ll be upfront: you’ll pay more for whole life insurance than any other type of life insurance. There are ways to save money on life insurance, but you’re not likely to save money with a whole life insurance plan.

That’s because you’re paying for the guarantee of your death benefit, monthly premiums, and cash value accumulation. With such a big payout, you’ll have to pay big premiums.

Your whole life insurance costs will depend on your age, health status, where you live, and whether you participate in risky work or activities.

Compare whole life insurance quotes before purchasing a policy to ensure you’re getting the most coverage for the best price. A State Farm whole life insurance quote will differ from quotes from other companies.

The Pros and Cons of Whole Life Insurance

Whole life insurance is a nuanced policy that can be a huge asset to you and your family in some circumstances. Typically, it’s a good fit for high-net-worth individuals who can afford the higher premiums.

Take a look at the pros and cons of whole life insurance to get a sense of whether it might be a good fit for you:

Talk to your insurance company about the specifics of your situation to see if whole life insurance could be a good fit. It’s worth pursuing if you:

• Have a high net worth and need estate planning
• Expect to have a lifelong financial dependent
• Want to add a new kind of investment to your portfolio
• Can afford higher premiums

Suppose whole life insurance isn’t a good fit. In that case, the flexibility of universal life insurance policies may work better for your financial and family situation.

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Other Types of Life Insurance

You could consider other life insurance types if cash value benefits or fixed premium amounts won’t work for you.

Term life insurance provides a death benefit for a fixed time, usually 20 or 30 years. If you stop paying your premiums, your policy automatically lapses, that’s part of how term life insurance works. Term life insurance is far more affordable than whole life insurance. It has more flexibility in payments and benefits, but it doesn’t offer savings benefits.

Universal life insurance covers you for your entire life, much like whole life insurance. However, you have more options for setting your premiums, coverage amount, and death benefit payout with universal life insurance. When comparing whole vs universal life insurance, it’s not as much of a guarantee as whole life insurance, but the flexibility it affords is a significant asset.

The Bottom Line on Whole Life Insurance Basics

Whole life insurance can be a great investment for high net worth individuals and others with certain financial situations. You’ll get a guaranteed death benefit payout and predictable premium payments, meaning you can carefully plan your finances throughout your life.

If managed well, you can maximize the investment of your whole life insurance policy by borrowing or withdrawing against your accumulated cash value. 

Talk with your insurance company and your financial advisor to see if whole life insurance is good for you and your family.

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