What Is Whole Life Insurance?

When you first dive into the world of life insurance, it can seem shallow from the outside, but oh so deep once you’re in. Let’s break it down for you and talk about one kind of permanent life insurance: whole life insurance.

What Is Whole Life Insurance?

Permanent life insurance lasts for as long as you live, or as long as you are paying for the policy. There are two kinds: universal and whole life insurance. Here, we will be looking only at the specific benefits of whole life insurance.

If you want to look more at how life insurance works or at universal and term life insurance specifically, you can check them out through the links.

Now, let’s look at whole life insurance in three ways:

  1. The insurance feature
  2. The savings and investment feature
  3. The loan feature

This will help you know exactly what you’re getting from this kind of permanent life insurance.

The Insurance Feature of Whole Life Insurance

Let’s look at what you can specifically expect from whole life insurance.

The death benefit. Life insurance is your safeguard and protection for your family and beneficiaries in case anything happens to you. This means you are basically paying premiums to make sure they get a death benefit. Unless health insurance comes as a rider, you are technically getting nothing from this insurance plan but a death benefit.

The premiums. For whole life insurance, when you buy the insurance policy, your provider offers you a specific premium. It is based on your age, state of health, current occupation and hobbies, etc. Whatever you set, it remains the same unless you upgrade your policy, change your provider, or otherwise alter the original agreement. You cannot allow your payments to lapse.

The riders. Riders are additional benefits your insurance provider may offer in your policy, without raising the premium price. They can include an advance on your death benefit in the case of disabilities or terminal illness, or even a waiver of premiums should you experience something that renders you unable to work and therefore pay for them. Riders are different per policy provider; check before you choose.

The Savings and Investments Feature of Whole Life Insurance

How does the savings and investments feature work?

Savings. Part of the premiums you pay will go into savings, which is called your policy’s “cash value.” The more premiums you pay, the more your cash value builds up. It has a return based on the provider’s agreement, which grows it even more. You can even deposit to the cash value to increase it (based on your provider’s minimum deposit).

Investments. Your provider invests the cash value “conservatively,” meaning the returns will be steady, but not high. It will also have much less fluctuation than the stock market. Think banking, but with a death benefit and riders.

The Loan and Withdrawal Feature of Whole Life Insurance

The loan and withdrawal feature makes whole life insurance beneficial even beyond the death benefit.

Withdrawal. When you have built up enough cash value, you can withdraw from that. If the amount you withdraw is equal or less than the total amount of premiums you paid, the withdrawal is tax-free. If it is larger than the total amount, there will be tax on the surplus. You can only withdraw from the cash value, so your death benefit will not be affected.

Loan. You may also take out a loan against the cash value of your policy (so it’s still a good idea to build up cash value first!). You will need to pay interest on the loan according to the current rates. Any loan left unpaid for any reason will be taken out of your death benefit when it activates, if the cash value does not cover it.

Whole vis-a-vis Universal Life Insurance

For you to see what kind of permanent life insurance you would prefer, let’s do a quick comparison of whole and universal life insurance.

Premiums. Whole life insurance premiums are fixed and do not increase over time; universal life insurance premiums can grow over time, but you can also lapse in your payments if the cash value is enough. The former is consistent and long-term; the second is flexible and adjustable even in the short-term.

Cash value returns. Whole life insurance returns are steady but low-yield; universal life insurance returns fluctuate with the current interest rates. There is both room for high growth and very low growth.

What Is Whole Life Insurance?

Whole life insurance is simple to understand, when you break it down. Look carefully at its benefits and how it fits your personality and lifestyle, and see if this is the best insurance policy for you.

James Donaldson

I like to blog about insurance, health and the great outdoors. Memphis born and raised.