Key takeaways

  • Whole life insurance is a type of permanent life insurance that lasts for the life of the policyholder as long as they pay their premiums.
  • Whole life insurance is more expensive than term life insurance, but provides more security and a cash value account that can be borrowed against.
  • Alternatives to whole life insurance include term, universal and final expense insurance.
  • How much life insurance you need depends on your financial goals and obligations.

With the various types of life insurance policies out there, finding the right one that will protect your beneficiaries after you pass away can be difficult. Each type of life insurance policy has its own set of advantages and disadvantages to consider. Whole life insurance is a type of policy that lasts for your entire life as long as you pay your premiums. It can also build up cash value over time. However, is whole life insurance worth it? To help you decide, Bankrate’s insurance editorial team, which includes licensed insurance agents, has put together this guide explaining whole life insurance so you can decide if it’s right for you.

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What is whole life insurance?

Whole life insurance is a type of permanent life insurance, which means as long as the policyholder pays their premiums, they’ll be covered for the rest of their life.

Under whole life insurance, your premium payments go toward funding your policy’s death benefit and paying administrative costs, but a portion also gets tucked into a savings account where it grows throughout the policy’s life. This amount is called the cash value account. You can borrow against this money during your life, use it to pay your premiums, and even withdraw it from your account. However, if you use any of the money from your cash value account and do not repay it, it will reduce the amount of your death benefit. Additionally, the cash value typically reverts to your life insurance company and is not part of the death benefit after you pass away.

Is whole life insurance a good investment?

Many consumers wonder if purchasing a whole life insurance policy is a good investment. The simple answer is that it depends. Before purchasing a whole life insurance policy, you may want to carefully review your financial goals and think about what the cash value portion of the policy could help you achieve.

Term life insurance may be a better option for people who just want a life insurance policy that pays a death benefit and nothing more. Term life insurance is typically less expensive, easier to get and protects you for a specific term of years that you choose. The money you save on premiums can be invested elsewhere as you see fit, taking into account your comfort level with risk.

Whole life insurance, on the other hand, typically costs more in annual premium than term life insurance. However, the added cost may be worth it if you’re interested in using the policy’s savings component and want a policy that won’t expire. Your money will grow over time, but the interest likely won’t be as high as if you invested in the stock market or another more volatile option over the long term.

If you’re financially conservative with your investments, whole life insurance can be a good option. However, returns are typically capped, so if you’re hoping to grow your money, you may want to consider alternative investment vehicles. Here is why whole insurance can be good, and some of the cons that can be associated with this policy as well.

Pros and cons of whole life insurance

Pro Con
Provides death benefit for your beneficiary Premiums are more expensive than term insurance
Policy lasts your entire life (as long as you pay the premium) Taking a loan reduces death benefit to your beneficiaries unless you pay it back
Premiums are guaranteed Cash value accrues slowly, with low interest
Able to borrow from cash value of policy on tax-deferred basis More complex than term insurance

Who should consider whole life insurance?

Whole life insurance may not be the right choice for everyone. The cost makes it prohibitive for some, and those looking for an aggressive investment vehicle might not be satisfied with the returns they get from their whole life policy.

You may want to consider whole life insurance if you:

  • Are looking to save money. The cash value portion of whole life insurance may help you save.
  • Want to ensure a death benefit is available for your family after your death. As long as you pay your premiums and comply with certain requirements, your policy will remain in effect for the rest of your life, and your loved ones will receive the death benefit. Term life insurance will also pay a death benefit, but only if the policy is still in effect when you pass away.
  • May need an influx of cash down the road. If you have children and will need to pay for education expenses like college tuition in 15 years or so, whole life insurance could help. However, other investment options may provide a more robust return than whole life insurance, so you may want to speak with a certified financial planner to map out your whole savings and investment portfolio.

Alternatives to whole life insurance

If whole life insurance doesn’t fit in with your financial plans, several other life insurance options are available.

Term life insurance

You may be wondering about the differences between term and whole life insurance. Term life insurance could be a great option for those who have younger children and want to ensure that they are financially provided for if you pass away before they are financially independent. The premium for this policy type is typically less expensive than a whole life policy, and you can choose how long you’d like the policy to remain in force. There is no cash value account with term life insurance. Term life policies typically run five to 30 years, and many have options for automatic renewal at the end of the term — but the premium may change. Some term policies come with optional endorsements that allow you to convert from term to permanent life insurance at a specific time before the policy term ends.

Universal life insurance

Like whole life, universal life is a type of permanent insurance that stays in force as long as you pay the premium. There are a couple of different types of universal life, based on how the cash value is allocated. Indexed universal life is tied to a market index and will fluctuate accordingly. Guaranteed universal life may be a lower-risk option that protects your investment. Variable universal life is similar to indexed but allows you to diversify your investment through money market accounts.

Final expense insurance

Also known as burial or funeral insurance, final expense insurance is a type of policy that does not require a medical exam and is intended primarily for your heirs to be able to pay for the costs of your funeral and other post-mortem bills. Final expense insurance can be beneficial to family members, considering that the median cost of funerals in the U.S. is about $7,848, based on data from 2021. Like other forms of guaranteed policies, it typically has a low payout cap around $25,000. On top of having relatively low maximum death benefits, final expense insurance also tends to be comparatively more expensive than other policy types because these policies are almost guaranteed to pay out.

Frequently asked questions

    • Finding the best life insurance company can be difficult with all the different types of life insurance companies out there, with many options available in the marketplace. However, life insurance rates are highly personalized to your individual circumstances, which impacts what types of policy and coverage amounts could work best for you. The best life insurance company for you will be the one that best fits your needs and your future financial goals. You may want to consider working with a certified financial planner to help you determine what you need to meet your financial goals. Working with a licensed life insurance agent can be beneficial to obtaining quotes and comparing costs and coverages.
    • Policyholders may decide they no longer need their whole life insurance policy if their spouse passes away before them or their children grow up and become financially stable. If this is the case, you may be able to sell your life insurance policy. You won’t receive the full death benefit amount, but you could receive more than just the cash value portion of the policy.
    • How much life insurance you’ll need depends on your financial goals. If you have young children who will have expenses such as college, a spouse with a mortgage, or a business partner who would fail if you passed away, you may want to purchase more life insurance than a single person with fewer financial obligations. When calculating how much coverage you need, working with a licensed agent or financial planner can help you ensure your financial goals are being met.
    • During the application process, most life insurer health questionnaires will include a few COVID-19 questions. Previously having COVID should not impact your ability to purchase new life insurance coverage, according to the Insurance Information Institute. However, if you are experiencing long COVID symptoms, that may be considered a chronic condition and could impact the rate you are charged.