How Does Whole Life Insurance Work?

Whole life insurance is a permanent type of coverage that never expires as long as the premiums are paid. A whole life policy offers insurance coverage as well as an investment option. Part of the fixed premiums policy holders pay are diverted to a savings feature which pays interest and increases in value over the term of the policy. Because whole policies accrue value over time, life insurance can be used as a tool in financial or estate planning.

Like all forms of life insurance, whole life has advantages and disadvantages, may not be the right choice for every individual and family, or term life insurance may simply be more affordable for your family’s budget. Comparing pros and cons and learning how whole life insurance works before purchasing is essential to finding the best policy for your needs.

Coverage Explained

All life insurance is intended to provide financial support for dependents if a wage earner dies prematurely. It also covers outstanding debts and final expenses, like business or personal loans, mortgage payments, credit card bills, medical expenses, and tuition for children. Term life insurance is temporary and inexpensive and provides the same insurance benefits as whole life insurance in the event of an insured person’s death.

However, term life insurance only pays a death benefit if the insured dies within a specified number of years, usually 10, 20, or 30 years in length. Whole life insurance is permanent, and guarantees payment of the death benefit whenever the insured person dies at any time, while helping the family accrue a nest egg for retirement through the cash value feature.

Permanent Life Insurance

Because whole life is permanent, the insured person never has to reapply for coverage and the policy cannot be cancelled by the insurer if the policy holder’s health deteriorates, or he/she develops a chronic or terminal illness.

Temporary term life policies must be renewed or replaced when they expire and the policyholder has to repeat the application process, usually resulting in an increase in premiums if the insurance company accepts the policyholder and underwrites the policy again.

A serious health condition or advanced age may make it impossible for an individual to find new term life insurance; whereas whole life insurance is a life-long policy and does not lapse or expire unless the policyholder stops paying premiums.

Policy Cash Value

The savings or equity in a whole life policy, also known as the cash value, grows over time and can be used in financial planning for retirement, a down payment on a home, or educational expenses. While the whole life policy is in good standing, up to 90% of the cash value can be used to secure no interest loans which do not have to be repaid. If the loans are not repaid, the amount is deducted from the death benefit when the insured person dies.

In most policies, a minimum interest rate is guaranteed on the amount in the cash value and some policies may also pay dividends. Whole life insurance as an investment can be a good one for families who need a forced savings account and a risk-free, stable rate of return.

Additionally, there are some tax advantages to using life insurance in financial planning since all returns on equity are tax-deferred and death benefit payments are tax exempt in the U.S.

Rates and Costs

Whole life insurance is likely the most expensive form of insurance since payment of the death benefit is guaranteed by the policy and companies will have to pay out one way or another in the future. The younger an individual is when he or she purchases a whole life policy, the lower your premiums.

In most cases, the premiums remain fixed and must be paid over the your entire life span, but there are policies available with limited payment plans or a single payment which become permanent with a large lump sum payment upfront and no further premiums.

Though whole life rates may not be as cheap as term coverage, this is because whole life protection can offer more benefits and advantages to the policyholder. To get life insurance quotes and see if a policy is the best, affordable coverage for your needs, compare life insurance quotes online.


Aside from the high cost, the biggest disadvantage of whole insurance is that it usually cannot be changed to meet changing financial needs. There are some adjustable policies which offer flexibility, allowing the insured person to alter the amount of the death benefit and premiums as his or her need for insurance increases or decreases. In most cases, whole life rates and policy coverage are fixed and permanent for a lifetime.

For some individuals who are weighing the pros and cons, the advantages of whole life outweigh the high cost and inflexibility of these policies, if you do your research and make the right decision the first time. The question is – is whole life insurance the best product for you and your family?

If you think whole life insurance is for you, consumers can find free rate quotes online to compare insurance companies. You can find the ones that offer cheap rates and good coverage, and request more information about policies to learn more.