All About Whole Life Insurance – What You Need To Know

eggs basketEditor’s Note: Good morning, peeps.  Our flight from Montego Bay to Charlotte, North Carolina got cancelled due to weather so we’re stranded at our hotel for another day.  Please enjoy this post from Gary Dek.  Gary is a former investment banker and private equity analyst. He blogs at and also contributes to, providing comprehensive life insurance guides for consumers looking for the best coverage at affordable prices.

Whole life insurance is the original type of life insurance, despite the fact that term life has become much more popular, and for a while, it was once the only kind available. Unfortunately, it was very expensive and companies decided to tweak the characteristics of the policy to make it affordable and thus less costly to the carrier.

How Can Life Insurance Provide Benefits For The Living?

To understand how whole life insurance provides financial benefits, here are the basics you have to know:

  • Fixed premiums and death benefits
  • Offers an investment component called a cash value
  • The cash value earns a fixed interest rate
  • Coverage for a lifetime
  • Significantly more expensive than term life insurance

As mentioned, whole life insurance diverts part of your premiums into a savings feature called the cash value. The insurance company guarantees the interest rate paid on the cash value, which is usually around 4%. Over the years, the cash value grows and it can be used as collateral for low interest loans without canceling the policy. If the loans are not repaid before you die, the owed balance is simply deducted from the death benefit. The money can be used to build a nest egg for retirement, finance college tuition, a down payment on a home, or to cover unexpected emergencies.

For example, if your whole life cash value amounts to $50,000 and you have a death benefit of $250,000. Later, you decide to pull that money out and use it as a down payment for an investment property, without repaying it because the interest is lower than your mortgage rate. If you were to die thereafter and the insurance company paid out your death benefit, your family would only receive $200,000.

The primary purpose for life insurance is the potential death benefit payout if anything happens to you. The death benefit of a policy helps support your financial dependents by covering living expenses so your family doesn’t have to struggle. It can also be used to cover final expense, such as funeral and medical bills, as well as outstanding debts, including your mortgage or auto loan.

Whole Life Insurance Basics

Fixed Premiums For Life. Traditional whole life insurance policies have fixed premiums over your lifetime. This means you will pay the same amount at age 50 as you did at 25. Term life insurance has lower initial premiums than whole life, but the insurance is temporary and must be renewed at expiration at a higher rate.

Fixed Death Benefit. Most people aren’t sure how much life insurance coverage they need to buy. Each family has a different financial situation and must opt for a balance between complete protection and affordability. While some advisors like to recommend a range of 5 to 15 times a policyholder’s income, the truth is that the calculation is more complex. Would a husband and wife combining for $100,000 per year and renting an apartment need as much protection as a family of 4 earning $100,000, with a mortgage and one child in college? The basic idea is to buy enough coverage to allow your family to continue their current lifestyle with the necessities.

Permanent Protection. Whole life insurance cannot be canceled by the insurance company and the death benefit never changes. Universal life insurance, another type of permanent life policy, has a death benefit that can fluctuate since it is tied to the cash value and invested in financial markets. Whole coverage guarantees payment of the face value of the policy if the insured person dies.

Calculating Life Insurance Rates

Life insurance premiums are based on many factors, but among the most important are your age, gender, general health, and whether you are a smoker or not. Companies base premiums on your statistically-calculated expected life span, while term insurance uses the length of the policy period in relation to your risk/life span. The longer the period of time, generally, the higher the term life insurance rates.

Pros and Cons of Whole Life Policies

Pros. Whole life insurance provides an automatic savings plan for those who do not have the discipline to make regular deposits in a savings account or retirement plan. The measly interest paid (usually less than 1%) on savings accounts is taxed when it is paid, but the interest paid (usually around 4%) on whole life policies is tax-deferred until it is withdrawn. You can use up to 90% of the cash value as collateral for a loan and have no income tax due on the money.

Cons. The primary disadvantages are the initial costs and lack of flexibility. While term life offers cheap premiums and greater flexibility due to its temporary nature, it does not accrue cash value and offers no benefits to policyholders who do not die during the policy term. Obviously you don’t want to feel like you have to die in order to “win”. While the death benefit of whole insurance cannot be changed to meet changing financial circumstances, term life policies can be used to supplement whole life when financial obligations increase and more protection is needed.

Why You Shouldn’t Buy Whole Life Insurance

Generally speaking, the verdict on whole life insurance is that you should only buy it if you absolutely need a forced savings account or you are an affluent family seeking effective tax advantages. Whole life premiums are a high price to pay for a lack of discipline, especially when coverage ranges from 5 to 10 more than term life insurance.

Any wise financial advisor will tell you to buy a 30 year term life insurance policy, take the difference you would have spent on whole coverage, and invest long-term in the stock market. With the stock market averaging just over 9% annual returns over the course of the last 100 years, you will build a large nest egg by the time retirement comes around.

Modified Whole Life Insurance

Modified whole life insurance was developed to make permanent coverage more affordable for young families who expect their incomes to rise over time. Instead of a fixed premium, modified whole life insurance has a low initial premium that increases incrementally over time. The lifetime payments total the same as for standard policies, but they are structured so young families can afford the security and cash value of permanent whole life insurance.

Other Payment Options

While the death benefit of whole life insurance is fixed, payment options other than fixed premiums are available. In addition to modified plans, other payment plans include limited and single payment options. The premiums for limited payment protection are high, but after a specified period of time, usually 20 years, the policy is paid up and remains permanent with no further payments. The single payment is paid in a lump sum when the policy is issued and remains in force unless you cancel it.

Final Word

If you think whole life insurance may be right for your financial situation and family, compare life insurance quotes online to find company worth working with. Although not our first choice when recommending a type of policy, whole life insurance does protect loved ones in the event that a policyholder dies prematurely and offers benefits while you are alive.


  1. says

    I don’t agree with your paragraph saying that withdrawing the cash value of the policy reduces the death benefit. I have a whole life insurance policy, and I pay each month into it. Part of my monthly payment is used to pay the premium, part of it is used to increase the cash value. The cash value grows as the money is invested into (relatively) safe investments by my life insurance company. The goal is to have enough cash value to continue to pay the premiums after retirement. Thus I have one less expense after retirement, but continue to have a life insurance policy for when I should pass away. The cash value is mine to withdraw as I please. I can then pay it back in a lump sum, or increase my monthly payments to gradually pay it back. The net is, the cash value is MINE. Withdrawing it doesn’t ever affect the death benefit – it only affects how much cash I would have stored up to pay my premiums after retire.

    • says

      I believe the author has it right. Any outstanding loans are subtracted from the death benefit at time of death.

      One big advantage of whole life is the waiver of premium option. If a policyholder becomes disabled, the premiums are waived. Compare this to the “buy term invest the rest” approach, which does not work out as well. Most people will forgo saving when unable to work.

      • says

        @Kevin – thanks for backing me up on that point and clarifying what I meant, if I accidentally gave Travis and other readers the wrong impression

      • says

        Kevin is right, if the cash value is taken out as a loan, and not paid back, it is taken out of the death benefit. Or, the policy can be completely “cashed out”, in which case there is no death benefit, since the policy is then terminated. I’ve known a lot of people to do that with their whole life policy.

        Actually, the waiver of premium can be added onto a term policy, depending on the options offered by the company you work with. It will cost a little more each month, but is something worth considering.

    • says

      Completely agree – whole life is not the right choice for the majority of American families. There is a saying “term life is bought, whole life is sold”, but again, it all depends on your needs and current/future financial situation.

  2. says

    I have an issue when people say that whole life insurance policies pay 4% interest. It’s certainly not 4% interest in the way that any normal person thinks about it. I’ve looked at several policies that quote a guaranteed 4% interest rate but when you actually run the numbers against the premium paid it comes out to less than 1% even after 40 years. It’s just a really inaccurate way to present the growth to consumers.

    • says

      You are definitely right. I just didn’t want to complicate the subject and turn this into 2,000 words explaining mortality charges, administrative expenses, surrender penalties, state premium taxes, withdrawal fees, etc. Like you said, after certain fees and expenses are deducted from the premium, a fraction makes it into the cash value of the policy, so although it is “4%”, you don’t earn that on your full premium. I recently wrote a very long article on “Term vs Whole Life Insurance”. Sorry if the article was at all misleading. I know you have a killer article on why whole life is a bad investment:

  3. says

    Personally, I don’t think insurance should be used as a retirement vehicle. Matt’s right about the return and really doesn’t start to pay off until you’re 20 years into the policy at which most people have already surrendered the policy. Another thing to look for is that the 1st years cash value should be at least half of the premium. If you have to buy a permanent policy then you should probably do it with a company that offers no/low load policies.

    • says

      For the average American family, I don’t think any ethical advisor would recommend insurance as a retirement vehicle, just like you said. As I mentioned in the article, an index fund tracking the S&P 500 will likely return, on average, 9-10% per year over the next 20-30 years, and with very low fees.

  4. says

    I think for the right person a whole life policy can be a good thing. The key though is understanding how it works and how it would apply to your specific situation. When I was in life insurance I saw a good number of reps trying to sell it as an investment vehicle when in many, many cases it shouldn’t be. I think if you can get a policy when younger it could work out well. I’ve also seen older clients use it as burial insurance essentially so their family would be able to cover the expenses of a funeral and such.

  5. Gary says

    Very true, but like you said, the families who would benefit from whole life are few and far between that the majority of consumers should opt for a term life policy, especially when it costs a fraction of whole life. Individuals just need to be more disciplined about saving and investing and most of these issues regarding the advantages of whole life would be dismissed. A Roth IRA from one of these online brokers,, would be a great place to start.

  6. says

    Great article Gary! Very well written. I find that many clients want whole life insurance because that’s what their parents had plus they want a savings component. However, when you break it down like you did here, term life is makes much more sense in the majority of the time.

  7. says

    Interesting, because the majority of what I’ve heard that past 10 years is that whole life is basically a rip off, and term is where it’s at. I’ll have to take a look at whole, but since my employer covers my life insurance, I probably won’t look at it until I have kids. Thanks for the info!

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