Whole life insurance

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Life insurance is one of the many types of coverages you may need throughout your life, such as renters, homeowners and car insurance. However, it is often one of the harder types of insurance to understand due to the number of options and types available.

Ultimately, there are only two main categories of life insurance: term or permanent. There are a few permanent types of life insurance and whole life insurance is typically the most popular.

What is whole life insurance?

As a type of permanent life insurance, whole life insurance lasts for life, as long as the premiums are paid, and beneficiaries are paid out upon the insured’s death.

But there is more to it than that: whole life policies also include a savings component, called “cash value,” and you can choose to borrow against the money in that savings account in certain circumstances. This savings account is funded by the policy’s premiums, and typically earns a small amount of interest.

How does cash value work?

As mentioned, the cash value part of a whole life insurance policy is designated for your use. You may borrow against it, use it to pay future premiums or make tax-free withdrawals — within limits. Withdrawals over the amount of the cash value will be considered taxable income and will reduce the death benefit amount that goes to your beneficiaries.

However, knowing how to leverage the cash value can be a useful tool. When you borrow against the cash value amount, you will not have to undergo a lengthy approval process from a bank or lender. You will generally enjoy a lower interest rate to pay back the funds. Just remember that any amount that remains unpaid when you pass will be deducted from the death benefit total.

Best whole life insurance

Many regional and national insurance companies offer whole life policies, and choosing the right one may require some research. A good place to start is to get whole life insurance quotes from the companies below. They are all financially sound, known for excellent customer service and feature competitively-priced policies that can be customized to meet varying needs.

  • Northwestern Mutual: The fourth highest pick on J.D. Power’s 2020 list of the best life insurance companies for overall customer satisfaction. The company offers financial planning services along with life, disability and long-term care insurance. Its financial advisors help people pick the best insurance product for their investment and financial goals.
  • State Farm: The largest insurance company in the U.S., it is in first place on J.D. Power’s list, indicating a high commitment to customer service. It offers whole life (called permanent life on its website) and term life, and has policies that offer flexible premium payments and level or increasing death benefit options. State Farm’s well-designed website makes it easy to manage policies online. One small caveat: it is not licensed to sell life insurance in Massachusetts.
  • MetLife: The insurer offers term and whole life policies for individuals and through businesses and scores above average on J.D. Power’s list and the company’s level of service indicates that most customer interaction is positive.
  • New York Life: It scores above the industry average on the J.D. Power survey and it offers several types of life insurance and retirement income investment, long-term care and other financial services. Although no insurer guarantees dividends, New York Life has been paying them annually for 164 years. The company offers two variations on whole life in addition to basic coverage: a Value Whole Life policy can be purchased closer to retirement to maximize coverage, and a Custom Whole Life policy allows higher premiums to be paid for a limited time to maximize the cash value growth.

The cost of whole life insurance

Generally, whole life insurance is more expensive than the same amount of term life insurance coverage. However, whole life premiums remain stable and will not change.

The cost will be determined by multiple factors, including amount of coverage needed, credit rating and relative health. During the underwriting process, a category is assigned based on these factors, and the rate is determined by how desirable the policyholder is considered to be.

Is whole life insurance worth it?

For some people, it is. Those with higher wealth who are looking for ways to defer taxes may benefit from the savings aspect of a whole life policy. And for those who have difficulty saving money, a whole life policy can serve as a forced savings vehicle to build equity while providing income to any heirs.

Term life vs whole life

While whole life insurance has many benefits, the cost may be prohibitive. Whole life policies are significantly more costly than term life insurance — and that proves a problem for the high numbers of policyholders who abandon their policies before they die. For those who cannot afford the relatively high monthly whole life premiums, a lower-priced term life insurance policy may be better.

Frequently asked questions

Is a whole life policy a good investment?

Whole life insurance probably should not be the centerpiece of any financial investment plan. It’s not really intended as a way to make money, and the returns are low on the cash value. Instead, its purpose is to allow people to leave a legacy. However, as one part of a balanced portfolio, the cash value portion of a policy, which earns interest and is tax-deferred, can be a sound investment.

How much life insurance do I need?

That depends on the insured’s situation and desired goals. One rule of thumb is to have a policy that can pay out 10-15 times the insured person’s annual income. But if there are no additional responsibilities beyond death — say, a child with special needs who will require life-long care — more coverage may be needed.

Do I need life insurance if I am single with no dependents?

Possibly not, since there are no heirs to support after death. It may be a good idea to take out a policy to pay for funeral expenses, though, or to remember a favorite charity or close friend. And if having access to the cash value of a policy seems like a good idea, it is worth investigating a whole life policy.

Written by
Cynthia Paez Bowman
Personal Finance Contributor
Cynthia Paez Bowman is a finance and business journalist who has been featured in Bankrate, Business Jet Traveler, MSN, CheatSheet.com, Freshome.com and TheSimpleDollar.com. She regularly travels to Africa and the Middle East to consult with women’s NGOs about small business development and works with select startups and women-owned businesses to provide growth and visibility.