Whole Life Insurance: What You Need to Know

Whole life insurance is a permanent policy that accrues cash value over time. However, higher premiums mean it's not for everyone.

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Whole life insurance

Also known as cash value insurance, whole life insurance policies are designed to stay in effect over the course of your entire life. They can help to provide peace of mind by providing for your loved ones in the event of your death.

Whole life insurance is the most common type of life insurance policy. Whole life insurance has a number of benefits, including the ability to build cash value over time. However, as monthly premiums can run substantially higher than the average term life policy, whole life insurance may not be right for everyone. Read on to find out more about the perks and drawbacks of whole life insurance policies and whether or not they offer the right coverage for you.

Who is whole life insurance best for?
Recommended for: Not recommended for:
Those in a higher tax bracket Those who are young and have lower incomes
Those who need insurance for more than 15 years Those who need a policy for less than 10 years
Those aged 35 years or older Those looking for high return investments
Those looking for long-term investments

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What is whole life insurance?

Whole life insurance is a permanent policy that provides coverage for your entire life—as long as you continue making payments. Unlike term life insurance, which expires after a set period, whole life policies include a cash value component that grows over time. This tax-deferred savings feature can be used to supplement retirement income or borrowed against if needed.

How whole life insurance works

Whole life policies have two main parts:

  • Death benefit – A fixed payout to your beneficiaries after your passing, designed to cover expenses and lost income 
  • Cash value – A built-in savings account that grows at a guaranteed (but usually low) interest rate. You can borrow from this value or use it to help pay premiums.

Key features of whole life insurance

  • Lifelong coverage – Your policy stays in place for life, as long as premiums are paid.
  • Fixed premiums – Your rates never increase, no matter your age or health changes.
  • Guaranteed growth – The cash value grows at a steady rate, though it’s usually lower than other investments.
  • Maturity at 100 – Once you reach 100, the policy "matures," and the face amount is paid out—even if you're still alive.

While whole life insurance offers stability and savings, those looking for higher returns may prefer other investment options like an IRA or 401(k). Keep reading to see if whole life insurance is the right fit for your financial goals.


The pros and cons of whole life insurance

Those interested in a whole life insurance policy should consider the following benefits and drawbacks of whole life insurance:

Pros Cons
  • Works as an additional investment vehicle
  • Cash value accumulation with guaranteed returns
  • Face value (death benefit) stays the same
  • Level premiums stay the same for the duration of the policy
  • The policy stays in place permanently
  • Substantially more expensive than term life insurance
  • A return rate that is much lower than other investment options
  • Continuing payments for the duration of the policy

How to access the cash value of your whole life policy

One of the biggest perks of a whole life policy is the tax-deferred cash value that it accumulates. The insured can access this money before the time of their death, differing greatly from term life insurance policies. Bear in mind that a lot of the operating costs are front-loaded with this type of policy, so the accumulation of cash value is typically quite slow at first. Still, after a few years of regularly paying premiums, policyholders can expect some cash value to appear. However, you should know when and how you can access this money to avoid issues. Below you'll find common ways of accessing your whole life policy's cash value.

Dividends

Some policies may pay yearly dividends based on company performance. These dividends can also be used to pay premiums if the policy allows. 

Dividend options include:

  • Cash dividends: Received by check once or twice per year
  • Accumulation options: Dividends stay with the insurer and continue to draw interest
  • Loan repayment: This goes toward any outstanding loans against the policy
  • Paid-up additions: Can be used to increase the face value and cash value of the policy
  • Reduced premiums: Can be applied to the premium, lowering the out-of-pocket expense of the policyholder
dividend

Surrendering the whole life policy

This option allows you to surrender the policy to the insurer and collect the accumulated cash value. Once the policy has been in place for a number of years, the cash value can be substantial. This is a common practice for those who wish to use the policy for supplemental retirement income. However, keep in mind that surrendering your policy removes the death benefit as coverage is no longer in place.

Borrowing from your whole life insurance policy

One unique benefit of whole life insurance is the ability to borrow against its cash value. As your policy matures, part of your premiums contribute to this cash value, which grows over time at a guaranteed rate—like a savings account with tax-deferred growth.

When you take a policy loan, you’re borrowing from your own cash value, so there’s no credit check or approval process. However, interest accrues, and if the loan isn’t repaid, it reduces the death benefit your beneficiaries receive.

While policy loans are typically not taxable as long as the policy stays active, tax implications can sometimes arise. It’s always smart to check with a tax professional or your insurer before withdrawing funds.

As Ben Franklin said, “Nothing is certain except death and taxes.” But with a well-managed policy loan, you can decide how and when to access your money.

How much can you borrow from your life insurance policy?

Many insurance providers will let you borrow up to 90% to 95% of the cash value. For example, if your policy cash value is $75,000, you can borrow $67,500 to $71,250. 

No minimum amount applies, and often, interest rates are lower than what they would be at a bank. In essence, you’re taking a loan out from your insurer using the cash value of your policy as collateral. If you fail to pay the insurance company back, they’ll simply take the cash value already associated with your policy and use that to pay themselves back.  


Whole life insurance and taxes

Death benefits paid out to your beneficiaries are not considered taxable income. However, because whole life insurance policies have a savings component that accrues interest, there are tax implications to consider.

While the cash value of a whole life policy grows tax-free, accessing that money can result in a tax bill. A whole life policy's cash value is made up of your premiums paid and the cash accumulated through interest (investment gains). The total amount of money paid through premiums is known as the policy basis. This amount is not considered taxable. For instance, if you have paid $15,000 of premiums, but your policy's cash value is $17,500, only the amount above $15,000 ($2,500) is considered taxable, as it represents investment gains.

If you withdraw less than the amount in premiums that you have paid, the money will not be subject to taxes.


Term vs. whole life insurance: Key differences

The key difference between term and whole life insurance is duration. Term life lasts for a set period (e.g., 10 or 20 years), and the death benefit is only paid if the insured passes away during that term. Because of its shorter coverage, term life is much more affordable but has no cash value. Once the term ends, a new policy must be purchased—often at a higher rate due to age. Some insurers allow term policies to be converted into whole life insurance.

Whole life insurance, on the other hand, provides lifelong coverage and builds cash value over time, acting like a savings component. This makes it significantly more expensive than term life but offers additional financial benefits.

Alternatives to whole life insurance

If you’re looking for long-term coverage but want more flexibility, other options exist:

  • Universal life insurance – A permanent policy that also builds cash value, but with adjustable premiums and an interest rate that can fluctuate.
  • Annuities – While not life insurance, annuities provide guaranteed income in retirement, helping protect against outliving your savings.

Each option serves different financial needs, so choosing the right policy depends on your goals, budget, and long-term plans.


How much is whole life insurance?

Because of the permanent nature of a whole life insurance policy, they tend to be much more expensive than term life policies. Overall, the cost of your whole life insurance policy will depend on a number of factors, including the following:

  • Age: The higher the age of the insured, the higher the risk to the life insurance company.
  • Health: Those in poor health or who have a checkered health history can expect higher premiums.
  • Supplemental coverage (riders): Adding coverage can increase your premiums substantially. 
  • Coverage amount: Higher value policies require higher premiums.
  • Credit history: Like many other types of insurance, those with lower credit scores can expect to pay higher premiums. 
  • Career, lifestyle and hobbies: Certain jobs or popular hobbies carry a much higher risk level, driving up what you'll pay for life insurance.

What is single premium life insurance?

Single premium life insurance is a type of permanent life insurance that charges the policyholder upfront and then provides lifelong coverage to the policyholder. Instead of making annual or monthly payments, you pay one lump sum upfront

Consider single premium life insurance if:

  • You’ve got cash to spare
  • You're young
  • You want to diversify your retirement planning
Pros
  • Your investment will grow over time

  • The death benefit is guaranteed

Cons
  • Extremely costly up-front

  • Withdrawals can be complicated

  • Tax implications*

The tax side of single premium life insurance

Back in the day, the wealthy used single premium life insurance as a tax loophole—dumping in cash, taking out interest-free loans, and avoiding penalties. But in 1988, Congress shut that down with the Technical and Miscellaneous Revenue Act, reclassifying these policies as modified endowment contracts (MECs).

Now, taxable gains come out before the principal, cutting many tax perks. Plus, if you’re under 59 ½, withdrawing cash or taking loans can come with penalties.

Bottom line: Talk to a tax expert before diving in to make sure you understand the impact on your finances.

How to find an affordable whole life insurance policy

It’s likely that the life insurance company you choose will require a medical exam as a part of the underwriting process. You will also have to answer a number of health questions regarding past illnesses or other conditions. Because your health information is used to help set premiums, it’s crucial that you be as open and as truthful as possible in order to prevent issues in the future. Overall, the best way to find an affordable policy is to compare options from multiple life insurance companies. Getting a number of life insurance quotes can help you compare rates and coverage options.


Can I cancel a whole life insurance policy?

Yes, whole life insurance policies can be canceled. In fact, whole life insurance policies are canceled at quite high rates due to customers overestimating their ability to pay higher premiums over the policy’s life.

However, canceling a policy within the first few years of its inception can result in a surrender charge. This charge is implemented to deter policyholders from canceling policies within the first few years of inception as costs incurred by insurers are often highest earlier in the policy. Surrender fees are often waived once a policy has been in place for a number of years. This allows policyholders to access funds from their policy without an insurer charge.

In short, if you wish to cancel your current life insurance policy but don’t want to lose your accumulated cash value, it may be worth applying your current policy’s equity towards the purchase of a new one.

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What if I can't continue making life insurance payments?

Because of the lifelong nature of whole life policies, it often occurs that many policyholders find themselves unable to continue making payments. However, whole life policies do have provisions that allow you to keep the value of the policy even if you find yourself in this situation.

  • Cash surrender value: You surrender your policy back to your insurer. In return, you receive the policy's current value. With this option, life insurance protection ceases.
  • Reduced paid-up life: This provision allows the policyholder to use the policy's cash value to fully pay for the life insurance policy with a lower face value than the original policy. 
  • Extended-term life insurance: This provision uses the policy's cash value to fully pay for coverage at the same value as the original policy. Keep in mind that the duration of this coverage will be determined by the cash value previously accrued.
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What happens if my whole life insurance policy lapses?

Most policies have a short grace period before the policy lapses. For those who have not been able to keep up with payments, however, most life insurance companies typically allow reinstatement of the policy. Policyholders typically have about three — and in some states, up to five — years to restore the policy. This entails making a formal reinstatement request as well as paying back premiums (with interest) and settling any loans on the cash value in full.

There are a number of reasons why a policyholder might want to consider restoring this policy. For instance, if you're searching for a new policy, it is not likely that you will get better premiums than a policy purchased when you were younger. Furthermore, interest rates on an older policy could make loans more favorable on a former policy. Bear in mind that insurers typically have the right to decline your policy's reinstatement.


How much whole life insurance do you need?

When you start shopping for a life insurance policy, an insurance agent will do a needs analysis to ensure that you purchase the right amount of coverage. Here’s a quick guide to help you determine the right amount of life insurance coverage.

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Evaluate what types of holdings or benefits will be available to your beneficiaries

This may include savings, property holdings, stock and bonds, social security and group or employer life insurance plans. Your spouse can receive social security survivor benefits immediately if you still have dependent children, but only after the age of 60 if there are no dependents. Your life insurance agent will be able to help you focus on a policy that takes your family's needs into account.

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Determine future obligations

Next, you will want to consider the costs that your beneficiaries will incur. 

  1. Final expenses: This can include funeral costs and medical expenses.
  2. College funds: If you have children and wish to provide for their college education.
  3. Outstanding debts: Credit cards, mortgage payments and other outstanding loans can impact the amount of coverage you need.
  4. Mortgage: The amount owed on your home.
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Determine income replacement

Bear in mind that it's not simply the costs associated with your death that a life insurance policy is paying but the overall income you would have produced. This can be more than many people might expect, so make sure to speak with an agent about how to set the correct coverage amounts to ensure your family is taken care of.


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Considerations

Whole life insurance offers security for both you and your family. Unlike a term policy that only offers death benefits, a whole life policy can help provide financial security in the form of cash value that you can access as extra retirement money. However, the sustained premiums over the duration of a whole life policy put them out of reach to many.

Suppose you are mainly concerned with providing a death benefit to your dependents in the event of an untimely or accidental death. In that case, term life insurance is likely to be a better — and cheaper — option. 

However, if you’ve got the financial flexibility to maintain payments on a permanent policy and the desire for fixed returns over the course of your life, a whole life policy may be a good choice.

Whole life insurance riders

Riders are additional coverage options that you can add to your life insurance policy. Common life insurance riders can include the following:

  • Chronic illness rider
  • Accelerated death benefit
  • Waiver of premium
  • Long-term care rider
  • Family income benefit
  • Child term rider
  • Guaranteed insurability rider
  • Term conversion rider
  • Cost of living adjustment

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