Benefits Of Whole Life Insurance: The Pros & Cons

A whole life insurance policy is a lifelong coverage that combines a death benefit with a savings or investment component. This type of insurance, also known as permanent life insurance, stands in contrast to term life insurance, which provides coverage for a specified term.

Whole life insurance offers financial security throughout one’s lifetime, with no expiration date. The premiums are usually higher than those of term life insurance, but they come with a range of benefits. This policy serves as an investment vehicle, accumulating cash value over time.

The cash value can also be withdrawn or borrowed against, providing a financial resource for various needs like education, emergencies, or retirement.

In addition, a whole life insurance policy guarantees a payout to beneficiaries upon the policyholder’s death, creating a financial safety net. This comprehensive insurance option offers long-term financial protection and savings potential, ensuring peace of mind and financial security.

Overview of whole life insurance

Whole life insurance guarantees payment of a death benefit to beneficiaries in exchange for level, regularly-due premium payments. The policy includes a savings portion, called the “cash value,” alongside the death benefit. In the savings component, interest may accumulate on a tax-deferred basis.1 Growing cash value is an essential component of whole life insurance.

To build cash value, a policyholder can often remit payments greater than the scheduled premium to purchase extra coverage (known as paid-up additions or PUA). Policy dividends can also be reinvested into the cash value and earn interest. Over time, the dividends and interest earned on the policy’s cash value will provide a positive return to investors, growing larger than the total amount of premiums paid into the policy.

The cash value offers a living benefit to the policyholder, meaning the policyholder can access it while the insured is still alive. To access cash reserves, the policyholder requests a withdrawal of funds or a loan. Withdrawals are tax-free up to the value of the total premiums paid.

Interest is charged on policy loans with rates varying per insurer, but the rates are generally lower than you’d get with a personal loan or home equity loan.

However, withdrawals and unpaid loans also reduce the cash value of the policy. Depending on the policy type and the size of its remaining cash value, a withdrawal could chip away at the death benefit or even wipe it out entirely.

Whole life insurance cash value

A cash-value life insurance policy is similar to a retirement savings account, in that it allows investments to accumulate tax-deferred interest.

Part of each premium payment goes toward the policy’s cash value, which can be withdrawn or borrowed against later in life. The cash value of a life insurance policy grows quickly when the insured is young. But because more of the premium is needed to cover the cost of insurance as the insured ages, the cash value grows more slowly as they get older, due to the higher risks associated with age.

The insured can access their policy’s cash value by borrowing against it the cash value, or by withdrawing money in a partial cash surrender. Surrenders will reduce the final death benefit of your policy.

You can also use the cash value to cover your monthly premium payments instead of paying out of pocket. Or you can surrender the whole policy to receive the entire available cash value (minus any surrender fees). However, the policy will be terminated and the death benefit is no longer be available to your beneficiaries.

Benefits of whole life insurance

Term life insurance will benefit you if:

You don’t want to tie up your cash flow. Term life is generally much less expensive than whole life, and it may be the better option if you want a lower premium payment.
You want to protect family members financially. Term life is a good choice if you want to protect your spouse or dependents against large debts or expenses. This can include mortgage or child care, by a guaranteed death benefit for a set period of time. An example of a time period would be your income-earning years.
You want the flexibility of waiting to purchase whole life insurance. Some term policies can be converted to whole life insurance at a later time. However, check the term policy to make sure it offers that option and note any conversion timeframe it may require. Keep in mind that after the policy’s term expires, you will not be able to convert it to a whole policy.

Other pros of whole life insurance include:

Permanence

As long as you keep up with the premiums, a whole-life policy can last your entire life. A term policy, on the other hand, is good for a certain number of years, after which you’ll typically have to replace it if you still need insurance. By then you may have more difficulty buying insurance—or getting it at an affordable price—due to your age or health issues.

However, people whose term policies expire often have more options than they realize for retaining some kind of insurance.

Tax breaks

As with the other forms of permanent insurance, the cash value in a whole-life policy grows tax deferred. By contrast, if that money were in a regular, non-retirement investment account, its interest and dividends would be taxed every year. What’s more, life insurance proceeds (the death benefit that goes to the beneficiary) are generally not taxable.

Hence, those investment gains may escape taxation altogether.

Predictability

With a whole-life policy, your premiums stay the same, as does your death benefit. With either form of variable life insurance, you’re subject to markets’ ups and downs. People who are uncomfortable with investment risk and want a permanent policy may do better with whole life.

Potential loan collateral

As mentioned above, policyholders can borrow against the cash value of their policies after a certain point. That could be useful in a financial emergency for someone who has exhausted all other sources for borrowing. And unlike other kinds of loans, they don’t have to pay the money back if they can’t or choose not to.

However, there are some major caveats here, one of which is that the policy’s death benefit will be reduced accordingly if they die before paying it back.

Cons of whole life insurance

Higher cost

Compared with term life insurance, whole life insurance is costly — between five and 15 times as expensive. One reason is that part of your premium goes to fund that cash value account. Another is that insurance salespeople typically receive larger commissions for selling whole life policies than term policies.

Lack of investment control

With a whole-life policy, the insurance company chooses how to invest the cash value part of your policy. If you’re an experienced investor and comfortable taking on some additional risk, you might prefer to invest that money on your own.

That is why one strategy suggests you “buy term and invest the difference.” With this method, you invest the difference between the cost of similar term and whole life insurance policies. In another option, a variable policy provides some investment options, but they’re limited to the funds the insurance company offers.

Smaller death benefit

Whole life is more expensive and you will receive a lower death benefit than you could get with the same amount of money with a term policy. So if you need a lot of insurance coverage for a set period of time — as you might if you have a young family dependent on your income — you may find term life insurance better fits your needs.

Why buy whole life insurance if it costs more?

Many people prefer whole life insurance because it is permanent and offers a cash value. Buyers are also drawn to the policies’ predictability since premiums and death benefits don’t change.

Whole life insurance also offers tax benefits in that the cash value in a whole life policy grows tax deferred.

Whole life death benefit

The dollar amount of the death benefit is typically specified in the policy contract. But it can be changed in some instances.

Some policies are eligible for dividend payments, and the policyholder may elect to use the dividends to buy paid-up additions to the policy, which will increase the amount paid at the time of death. Death proceeds are non-taxable to the beneficiary.

The death benefit can also be affected by certain policy provisions or events. As mentioned before, unpaid policy loans (including accrued interest) reduce the death benefit dollar for dollar.

Alternatively, many insurers offer voluntary riders—for a fee—that secure or guarantee coverage, including the stated death benefit. Two of the most common such riders are the accidental death benefit and waiver of premium riders, which protect the death benefit if the insured becomes disabled or critically or terminally ill and is unable to remit premiums due.

Beneficiaries may also have decisions to make about how the death benefit is paid. The default option is to receive a lump-sum payment. But some policies also allow beneficiaries to choose to get the death benefit in installments or to convert it to an annuity. An annuity may pay out for a set amount of time until the death benefit is exhausted, or it could pay out for the life of the beneficiary.

The death benefit continues to earn interest until it is paid, and that interest may be taxable.

Term vs whole life insurance

Term vs whole life insurance are two distinct types of life insurance policies, each with unique features and benefits. This term life insurance provides coverage for a specified period, often 10, 20, or 30 years. It offers a death benefit to the beneficiary if the insured individual passes away during the term.

Premiums are generally lower for term policies, making them an affordable choice for temporary needs like paying off a mortgage or ensuring income replacement for young children. However, term policies do not accumulate cash value, and the coverage expires at the end of the term.

On the other hand, full life insurance, also known as permanent life insurance, offers lifelong coverage. It combines a death benefit with a savings or investment component. Premiums are typically higher than term policies but remain level throughout the policyholder’s life.

Whole-life policies accumulate cash value over time, which can be withdrawn or borrowed against. They also provide a guaranteed death benefit, ensuring financial security for the beneficiaries.

In summary, term life insurance is ideal for short-term financial protection, while full life insurance is a long-term, comprehensive solution that combines insurance with savings and investment features.

Comparing term and whole life insurance

Cost

It’s impossible to make a direct cost comparison of term life vs. whole life insurance because the policy features are so different. If you’re looking for a long stretch of coverage with term life, look at 30-year policies. Banner Life (part of Legal & General America) and Protective Life offer 40-year term life, which is currently the longest level term available.

Whether you decide to buy term or whole life insurance, your life insurance quotes will be affected by:

Your age and gender.
Amount of coverage.
Your current and past health.
Your family’s health history (parents and siblings).
Your prescription drug history.
Other factors such as driving record.

Payouts

Whole life and term life policies have a payout called the death benefit. The death benefit is guaranteed with both types of policies. A death benefit is paid tax-free to the life insurance beneficiaries you have listed.

The main difference is that coverage ends with a term life policy if you don’t renew it every year after the level term period ends. If you outlive your term life policy and don’t renew it, there is no death benefit ever paid.

Cash value

Term life insurance builds no cash value while whole life policies contain a cash value account that builds over time at a fixed earnings rate. This guaranteed cash value growth in a whole life insurance policy is one of the reasons whole life is considerably more expensive than term life.

The policyholder can take money from the available cash value. You can take a loan against it and pay for anything you want. Or take out money as a withdrawal that you won’t pay back. The outstanding loan or withdrawal amount is deducted from the death benefit.

Any cash value in the policy usually reverts to the insurance company when you pass away. Your beneficiaries receive the face value of the policy minus any amount that was taken out of cash value and not paid back.

If you’re looking for lifelong coverage without the high cost that a whole life insurance policy demands, consider guaranteed universal life insurance.

Premiums

Both level-term life and whole life have fixed premiums. That means your premium payments won’t change. Life insurance companies generally offer payment plan choices, such as monthly, quarterly, semi-annually and annually.

If lifelong bills for whole life insurance aren’t appealing, some policies offer shorter payment schedules with larger payments, such as single premium life insurance, or policies with payments for a certain number of years, such as 10 years. This allows you to have more budget flexibility later in life.

Ending a policy

While you do your best to anticipate financial needs many years down the road, you might find you no longer need life insurance.

With term life insurance, you can stop paying, which terminates the policy. Since there’s no cash value, there’s no money to walk away with.
With whole life insurance, you may have cash value to take away if you surrender the policy.

If you don’t tell your insurer that you want to surrender your life insurance policy, the insurer will likely use any cash value in the whole life policy to continue paying the premiums on your behalf until the cash value is depleted. Instead of walking away, contact the insurer and take the surrender value, which is the cash value minus any surrender charge.

Benefits Of Whole Life Insurance: The Pros & Cons