There are a few different types of life insurance policies to choose from when you’re shopping for coverage. That includes whole life insurance, which is a type of permanent life insurance policy that remains in place for your entire life and guarantees a death benefit as long as premiums are paid. However, while whole life insurance may offer a number of unique perks, it may not be the best option for everyone. Before you make a decision on your life insurance coverage, it may benefit you to learn more about the pros and cons of whole life insurance, as well as how it works, in order to make the best choice possible for your unique circumstances.

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Key takeaways

  • Whole life insurance is a permanent policy that remains in force for your entire life, as long as premiums are paid, and guarantees a death benefit.
  • Whole life insurance policies may cost two to three times more than term life insurance policies because of the expected payout.
  • Whole life insurance policies usually have a cash value component that you may be able to put towards premiums when enough funds accumulate.

What is whole life insurance?

Whole life insurance offers coverage for your entire life as long as you’re paying your premiums and the terms of the policy are met. In return, the death benefit is essentially guaranteed to be paid out to the beneficiaries in the event that the policyholder passes.

In addition, whole life policies typically include other benefits, like a cash value component, which is an account that accumulates funds over time. This account is funded by the policy’s premiums. As the policyholder, you can usually choose to borrow against the cash value component during your lifetime under certain circumstances.

How does cash value work?

The cash value component of a whole life insurance policy can be used in a variety of ways and has a few tax considerations to keep in mind. You may be able to borrow against it, use it to pay premiums or make tax-free withdrawals within policy limits. Withdrawals over the amount of the cash value may be considered taxable income and will reduce the death benefit amount that goes to your beneficiaries. Your beneficiaries will also not be able to access this cash value when you pass away, as it can only be used while you are alive.

Knowing how to leverage cash value life insurance may 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, and you will likely enjoy a lower interest rate. Borrowing against the cash value account may be the right fit for individuals in a pinch who want a loan with an easy approval process.

Additionally, a loan against the cash value is not reported to credit bureaus, meaning it does not impact your credit score. Just remember that any amount that remains unpaid when you pass will likely be deducted from the death benefit total.

Best whole life insurance

Many regional and national life insurance companies offer whole life policies, so choosing the right one may require some research. Bankrate’s list of the best whole life insurance companies may be a great place to start your search. To determine the top whole life companies, our insurance experts considered customer satisfaction rankings from J.D. Power’s 2022 U.S. Individual Life Insurance Study, financial strength scores from AM Best, recorded complaints with the National Association of Insurance Commissioners (NAIC), available coverage options and digital policy management tools.

How much does whole life insurance cost?

Generally, whole life insurance is more expensive than the same amount of term life insurance coverage. This is because whole life insurance policies are guaranteed to be paid out, as long as the policy remains in force and premiums are paid.

Your specific whole life insurance policy cost is determined by multiple factors, including the amount of coverage you choose and the type of underwriting involved. Other factors that may impact your premium include:

  • Age
  • Health status
  • Hobbies
  • Occupation

A simplified issue policy doesn’t require a medical exam, which may make this option more expensive. Applications with serious health issues who don’t want their health evaluated or have been turned down before may want to consider guaranteed issue whole life. It doesn’t factor in any health information in the rating, typically making it the most expensive option.

Is whole life insurance worth it?

Some people may prefer whole life insurance because it remains in effect for the insured’s entire life and because the cash value component may add additional financial flexibility. However, these financial components also typically contribute to a higher rate compared to premiums associated with a term life insurance policy. Whether or not whole life insurance is worth it to you likely depends on your financial situation, budget and long-term goals.

Whole life insurance may be best for people who want a policy to remain in force for their entire lifetime and guarantee a payout to their beneficiaries. The cash value may provide a future nest egg to pay for a child’s education or supplement retirement.

On the other end of the spectrum, some people may prefer the shorter-term coverage that comes with a term life policy. For instance, if you only want coverage for a limited amount of time — such as when your children are in school or while you still owe on a mortgage — you may find that a term policy better suits your needs. If deciding between term life vs. permanent life insurance, evaluating your immediate and long-term needs, budget and purpose for life insurance may help you make a choice.

Frequently asked questions

    • A whole life insurance policy comes with a cash value account that can be invested, but since it is considered low-risk, the cash value is usually minimal. Whole life insurance policies are designed to provide loved ones with a death benefit after your passing rather than to act as an investment vehicle. While the investment component of insurance may be a nice added perk to a whole life insurance policy, other forms of investment, such as a universal life insurance policy, may generate higher returns. A financial advisor may help you determine whether or not a whole life policy is right for your situation, taking into account its investment component.
    • Whole life insurance offers permanent coverage, while term life insurance offers temporary coverage. As long as premiums are paid and the terms of the policy are met, the whole life policy will pay out a death benefit to the insured’s beneficiaries. A term life policy will only pay out the death benefit if the insured dies while the term policy is in force. Term life will expire after a certain number of years, although some policies may have the option to convert to a permanent policy.
    • How much life insurance you need typically depends on your situation and the goals you have for your policy. You may also want to keep in mind your individual financial obligations when determining the amount of life insurance you need. For instance, if you have personal debt, a mortgage or upcoming college tuition payments for your children, you may want to factor in those expenses. If you financially support someone into adulthood, such as a family member with a disability, you may want to factor their living expenses into your life insurance coverage as well. A licensed agent or certified financial professional may be able to guide you in estimating how much life insurance you need, or you can use Bankrate’s life insurance calculator as a starting point.