What is whole life insurance?

Life insurance can provide financial protection for your loved ones in the event of your death and, possibly, for yourself while you're still alive. There are several types of life insurance, and choosing the right one is vital to ensure your policy meets your needs. If you're looking to purchase life insurance, two of the most common forms you'll encounter are whole life and term life insurance.

While term life insurance covers you for a defined period and provides a death benefit, whole life insurance provides coverage for the rest of your life and has a cash value account that earns interest. 

If you're in the market for life insurance then start by getting a free quote so you know what to expect.

Here's what you need to know about whole life insurance, including its benefits and costs.

What is whole life insurance?

Whole life insurance is a type of permanent life insurance that pays a death benefit when you die. These policies, which include traditional whole life, universal life and variable life, provide life insurance protection for your entire lifespan. They also offer level premiums, meaning your monthly payments will remain the same.

Whole life policies include a cash value savings account. A portion of your premiums is invested and grows tax-deferred over time at a guaranteed rate—typically 1% to 2%, which is set by your insurance company.

Cash value is what distinguishes whole life insurance from other life insurance types. Your cash value typically takes 10 years or more to break even with your premiums. As your account grows, you may have the opportunity to make withdrawals and loans against your cash value while you're alive. 

The cash benefits of a whole life insurance policy are significant. Start by getting a free price estimate now.

How whole life insurance works

Premiums for whole life insurance are the same amount for the life of the policy. As a result, the premiums for whole life insurance are typically higher when you first purchase insurance than they are for a term life insurance policy. 

However, if you take out a term policy and renew it several years from now, the premiums for the renewed term life policy would likely be higher than the premiums you might pay on a whole life insurance policy. Many insurance experts recommend purchasing whole life insurance when you are younger to lock in a lower rate.

As mentioned, whole life insurance policies include an investment component that builds cash value over time. Depending on your policy terms about access to your funds, you may be able to make a withdrawal or loan against your cash value.

You may use your life insurance to make withdrawals to cover college tuition, home renovation projects or even to donate to your favorite charity. Keep in mind, if your policy allows you to cash out more than your available cash value amount, you'll incur income taxes on the excess amount. What's more, any amount you withdraw will reduce the death benefit payout to your beneficiaries.

You may also be able to take out a loan from the cash value of your whole life insurance policy without a credit check. You'll incur interest charges ranging from 5% to 8% until you repay the loan in full. You have the choice to pay back the loan yourself or from death benefit funds after your death.

Pros of whole life insurance

Whole life policies provide benefits that may meet your insurance needs, such as:

• Insurance coverage is lifelong with a fixed premium and death benefit.
• Policy includes cash value that earns interest.
• Cash value account offers a guaranteed rate of return
• You can withdraw or borrow from the cash value.

Whole life insurance policies offer a variety of benefits that protect you and your family. Get a free price quote now!

Other considerations

While having a tax-deferred investment may be a good addition to your portfolio, the cost of coverage may not be worth the low rate of return. Consider the other elements of whole life insurance, too.

• Coverage is more costly than term life insurance.
• Borrowed or withdrawn money lowers the policy's death benefit.
• All cash value funds you don't withdraw or add to your death benefit go back to the insurance company.
• The rate of return is low compared to other investments.

How much do whole life insurance policies typically cost?

Your rates will depend on your own circumstances, and rates can vary by insurer.

Life insurance companies set premiums based on your life expectancy, which can vary depending on your age, gender, tobacco usage and overall health. Generally, the younger and healthier you are, the lower your premiums. That said, older adults can still potentially secure cost-effective and valuable life insurance, so don't automatically disqualify yourself by age. 

Insurance companies classify applicants in separate risk classes, often referred to as standard, preferred and super preferred. These insurers may require you to take a medical exam. Many will allow you to skip the exam, although you'll have to pay higher premiums in most cases.

Whole life insurance may be a solid option if you want long-term protection and can make high premium payments. Conversely, a whole-life policy may not make sense if the premiums prevent you from saving.

Have more questions? Not sure what it would cost you? Start by getting a free price estimate to determine what you're eligible for.