What is whole life insurance? It’s a type of life insurance that offers not only the traditional death benefit for your loved ones, but cash value you can use during your lifetime. We’ll go over the benefits and drawbacks of whole life coverage below so you can make an educated decision for your family’s needs.
➡️ Want to talk to a real person about whole life insurance? Call us at 800-823-4852 – we love talking about life insurance and we’re happy to help!
Request a Free QuoteWhat Is Whole Life Insurance?
Like any type of permanent life insurance, the main idea is the same: you make monthly (or yearly) payments, and no matter when you pass away, your beneficiary(ies) receive an income-tax-free cash payout. If you have people who depend on your income, the life insurance death benefit replaces that income. This is the number one reason to buy a policy: future financial security for your loved ones. If you don’t like the idea of your spouse and kids having to sell the house, move, change schools, or get multiple jobs to help make up for your lost income, protect them with life insurance!
And unlike term policies, which don’t cover you for your entire life, whole life has no expiration date. As long as you keep making payments, the insurance company will honor the contract and pay your loved ones when you pass away.
Whole life insurance also has a cash value component. It’s similar to a savings account. A portion of every payment you make gets deposited into your cash value account. The insurer will pay a set rate of interest (fixed at the time you buy your policy) on your cash value, helping it grow over time. Later, you have multiple ways to access that money for anything you want: a trip, a home renovation, medical bills, retirement income, college tuition for the kids, etc.
You also have the option to add riders (policy add-ons) that provide additional benefits, usually for a fee. Most insurers offer a free rider that lets you access some of the death benefit if you’re diagnosed with a terminal illness. Paid riders will let you access the death benefit if you are diagnosed with a chronic illness or need long-term care. These riders are a great way to make life insurance more useful for you, the policy owner – you don’t have to pass away to benefit from your coverage!
➡️ Want to talk to a real person about whole life insurance? Call us at 800-823-4852 – we love talking about life insurance and we’re happy to help!
Request a Free QuoteThe Benefits of Whole Life Insurance
- Guaranteed death benefit. As long as you keep your policy current by making payments, your loved ones are guaranteed to get that income-tax-free cash payout when you pass away. You don’t have to worry about outliving a policy term and having nothing to show for it.
- Cash value growth. With whole life, you have a guaranteed cash value growth, too. The interest rate your insurer pays is set and fixed when you buy the policy. No matter what happens in the economy or stock market, that interest rate is guaranteed to grow your cash value. Is it slow growth? Yes – but it’s guaranteed.
- Payments never increase. The rate you pay when you buy your policy is locked in for life. That’s not unique to whole life insurance (term life rates are also locked in), but there are other types of permanent coverage that offer changeable rates. If you like planning and consistency or are on a fixed budget, whole life makes it easy to create a budget and stick to it.
- Tax benefits. Your loved ones will not have to pay income tax on the death benefit. (This only happens if your overall estate exceeds the government’s estate tax threshold, which is unlikely for most people.) Plus, your cash value grows tax-deferred, allowing for faster growth and the benefits of compounding interest over time. When you pull money from your cash value later, you are allowed to pull up to the exact dollar amount you’ve paid into your policy with zero tax liabilities.
- Possibility to earn dividends. If you buy what’s called a “participating” policy from a mutual insurance company (with “mutual” in the name), it means you’re actually buying part of the company along with your policy. You can then share in any dividends paid when the company makes enough profit. Those dividends are not taxed because they’re considered a return of some of the premiums you’ve already paid. Many of our clients use their dividends to buy additional coverage and earn even more cash value over time – a great way to fight the effects of inflation! You can also use your dividends to pay your insurance premiums.
- Access cash value later in life. Your insurer will offer several ways to access your cash value: loans, withdrawals, and surrender value. Loans are income-tax-free, and usually offered at a very low rate of interest. If you pay them back, fantastic. If you don’t (or pass away before you’ve finished repayment), the insurer will simply subtract what’s left on your loan from the death benefit before paying it out to your loved ones. If you withdraw the money instead, as we mentioned above with tax benefits, you owe zero tax until you withdraw more than you’ve paid into your policy over the years. At that point, the interest-based gains from your cash value account would become taxable.
➡️ Want to talk to a real person about whole life insurance? Call us at 800-823-4852 – we love talking about life insurance and we’re happy to help!
Request a Free QuoteThe Drawbacks of Whole Life Insurance
- Cost. We love whole life insurance, but there is one thing you’ll need to consider: the cost. It’s anywhere from 5-10 times more expensive than a term policy. That higher cost is a trade-off you’ll have to consider. We’ll do our best to find you the most affordable whole life policies out there, but it all comes down to your decision on what’s best for your budget and your needs.
- Initial cash value growth is slow. You should also be aware that your cash value growth will be slow for the first few years of your policy. Cash value isn’t meant to provide an instant source of liquid cash right away; it’s an asset designed to grow over time. If you’re looking for instant riches, whole life isn’t the answer. What it can do, however, is protect your loved ones with a death benefit and grow a liquid asset over time.
- Cash value is “use it or lose it.” Whole life policies aren’t designed to convey the cash value to your beneficiary(ies). That means it’s up to you to use it during your lifetime. Some insurers do offer the ability to transfer the accumulated cash value along with the death benefit, but there’s often an extra cost to the policy to do this. It’s best to think of the cash value as a resource you can and should use during retirement.
➡️ Want to talk to a real person about whole life insurance? Call us at 800-823-4852 – we love talking about life insurance and we’re happy to help!
Request a Free QuoteWhole Life Insurance Use Cases
We have clients from all walks of life who need life insurance to cover children, parents, businesses, and more. Here are just a few of the cases we’ve seen where whole life insurance saved the day:
- Special needs child. If you have a special needs child and want to provide for their care after you’re gone, whole life insurance is a great way to do that. Not only will you have cash value to use in your lifetime, but your child or their guardian(s) will have the death benefit payout to fund their care for a long time to come.
- Business partnership. If you’re part of a business partnership, whole life insurance can be a part of succession planning. Business partners can take out whole life insurance coverage on each other, so that if one partner dies, the other partner can use the death benefit to buy out their share of the business. This is a great solution if either partner’s family doesn’t want to continue the business. Life insurance can keep that business in the hands of someone who knows it, enjoys it, and wants it to continue.
- College tuition. We’ve seen young parents insure themselves when they have a new baby, intending to use their cash value to put that child through college in 18 years. This strategy can really work well if you act at the right time. Because cash value needs time to grow, buying the policy as soon as you have a child is a smart move; it’s also smart because life insurance is always cheaper when you’re young and healthy. Since you’ll never be as young as you are right this second, there’s no better time to get that policy bought so your cash value has time to grow.
Overall, we think whole life insurance is a great way to protect your loved ones and grow cash value, a good asset to have as part of your overall financial portfolio!
➡️ Want to talk to a real person about whole life insurance? Call us at 800-823-4852 – we love talking about life insurance and we’re happy to help!
Request a Free QuoteThis content is provided for informational purposes only. Please consult your financial and tax professional for complete and up-to-date information about any tax liabilities you may incur. Your life insurance agent can provide you with an illustration showing projected cash value growth over time.