Whole Life Insurance Definition: How It Works and Examples

What is Whole Life Insurance?

Whole life insurance covers the insured’s whole life. Whole life insurance, in addition to providing a tax-free death benefit, has a savings component that allows cash value to build. Interest is tax-deferred.

Whole life insurance plans are one of many forms of permanent life insurance that provide coverage for your whole life. Other options include universal life, indexed universal life, and variable universal life. You may pick a whole life insurance policy that is right for you from one of these top life insurance providers.


  • Whole life insurance is permanent, while term life insurance is just for a certain number of years.
  • Most whole life plans have flat premiums, which means the amount you pay each month will not fluctuate.
  • Whole life insurance has a cash savings component known as the cash value, which the policy owner may use or borrow from.
  • A whole life policy’s cash value is normally paid out at a predetermined rate of interest.
  • Withdrawals and remaining loan amounts diminish death benefits.

How Does Whole Life Insurance Work?

Whole life insurance assures that recipients will receive a death benefit in return for recurring premium payments. The insurance contains a savings part, known as the “cash value,” in addition to the death benefit. Interest on savings may be accumulated tax-deferred.1 Growing cash value is an important aspect of whole life insurance.

To increase cash value, a policyholder may typically pay more than the regular premium to obtain additional coverage (known as paid-up additions or PUA). Policy dividends may also be reinvested in cash value to generate interest. Over time, the dividends and interest produced on the insurance’s cash value will offer a positive return to investors, outpacing the entire amount of premiums placed into the policy.

The cash value provides a living benefit to the policyholder, which means it may be used while the insured is still alive. To access cash reserves, the policyholder seeks a withdrawal or a loan. Withdrawals are tax-free up to the amount of all premiums paid.1

Policy loans incur interest at variable rates depending on the insurer, although the rates are often lower than those offered by a personal loan or home equity loan.

However, withdrawals and outstanding loans lower the policy’s cash value. Depending on the kind of policy and the amount of residual cash value, a withdrawal might reduce or eliminate the death benefit completely.

Whole Life Insurance Cash Value

A cash value life insurance policy, like a retirement savings account, enables investors to earn tax-deferred interest.

A portion of each premium payment contributes to the policy’s cash value, which may be withdrawn or borrowed against later in life. A life insurance policy’s cash value increases fast when the policyholder is young. However, since more of the premium is required to pay the cost of insurance as the insured ages, the cash value rises at a slower rate owing to the increased risks associated with aging.

The insured may access their policy’s cash value by borrowing against it or withdrawing funds in a partial cash surrender. Surrenders diminish the ultimate death benefit of your policy.

You may also use the cash value to pay your monthly premiums rather than paying out of pocket. Alternatively, you may surrender the whole policy and get the full cash value (less any surrender costs). However, the policy will be canceled, and your beneficiaries will no longer be eligible to receive the death benefits.
certain firms in the United Kingdom and Australia provide insurance bonds with their policies, which give certain tax benefits.

Whole-Life Death Benefit

The financial amount of the death benefit is usually mentioned in the insurance contract. However, it may be modified in certain cases.

Some plans are eligible for dividend payments, and the policyholder may use the income to purchase paid-up additions to the policy, increasing the amount paid upon death.

Specific policy clauses or circumstances might also have an impact on the death benefit. As previously stated, outstanding insurance loans (including accumulated interest) diminish the death benefit dollar for dollar.

Alternatively, for a cost, many insurers provide optional riders that assure or guarantee coverage, including the specified death benefit. Two of the most frequent types of riders are the accidental death benefit and the waiver of premium riders, which safeguard the death benefit if the insured becomes incapacitated or seriously or terminally sick and is unable to pay premiums.

Beneficiaries may also have to decide how the death benefit is paid. The default choice is to get a lump sum payment. However, some plans enable recipients to receive the death benefit in installments or as an annuity. An annuity might pay out for a defined period of time or for the beneficiary’s whole life. The death benefit continues to accrue interest until it is paid, and this interest may be taxed.

Uses for Whole Life Insurance

A whole life insurance policy, like any other kind of life insurance, provides financial stability for people and their families in the event of a breadwinner’s death. For families who depend on a single person’s income, a whole life insurance may offer financial stability in the event of an unexpected loss of income.

However, unlike term life insurance, whole life may be utilized as an investment. Once the cash worth has increased enough, you may be able to withdraw or borrow from it to fund major purchases such as a house. Some individuals use whole life cash value to boost their retirement income when the market is down.

Whole life insurance may also help firms prepare for the loss of a key employee or partner. If a valued employee dies, a whole life insurance might give cash compensation for the loss of their abilities or knowledge. If the dead is a part-owner of the firm, a whole life insurance may give the surviving owners with enough funds to purchase the deceased partner’s portion of the business.

Types of Whole Life Insurance

There are numerous forms of whole life insurance, which are classified according to how premiums are paid.

  • Premiums stay constant for the length of the policy. This is the most popular sort of payment plan.
  • Single Premium: The insured pays a hefty premium once, which finances the coverage for the rest of his or her life. However, this form of insurance is usually invariably a modified endowment contract, with tax implications.
  • Limited Payment: As the name implies, you make a certain number of payments. Premiums will be greater than under a level-payment plan, but you will only pay for a certain number of years.
  • Modified Whole Life Insurance: Unlike a limited payout policy, this form of whole life insurance has lower premiums than a typical policy for the first two or three years, but higher rates in the latter years. It costs more in the long term.
  • Whole life insurance policies are further divided into participating and non-participating plans. With a non-participating policy, any excess premiums above payments are profit for the insurer. However, the insurer accepts the risk of losing money.

With a participation insurance, any surplus premiums are returned to the insured as a dividend. This payout may then be used to make payments or to enhance the policy’s coverage limits. Dividends, on the other hand, are not guaranteed and can fluctuate year after year since they are largely determined by the financial success of the firm.

Whole life insurance vs term life insurance.

Whole life insurance, like term life insurance, provides a payment upon the insured’s death. However, there are significant distinctions. While whole life insurance provides a guaranteed death benefit for the insured’s whole life, a term policy only pays out if the insured dies within a certain time frame—typically 10, 20, or 30 years.

There are further factors. To offer more benefits, a whole life insurance has much higher premiums than a term policy with the same coverage limit. Whole life premiums are normally set for the period of the policy, while term rates rise with each renewal as the insured ages.

Advantages and disadvantages of whole life insurance


  • Lifetime coverage.
  • Cash value may be used for loans, withdrawals, or premium payments.
  • Guaranteed Death Benefit Amount.
  • Predictable premium payments.
  • Tax-free loans


  • More costly than term life.
  • Cash value may increase slower than with other plans.
  • There is no flexibility to change the premium.
  • Limited ability to change the death benefit.

Advantages Explained

  • Lifetime coverage: Whole life insurance, like all permanent insurance, provides coverage until the policyholder dies.
  • Cash value may be used for loans, withdrawals, or premium payments: A portion of each premium payment builds as cash value, which you may withdraw or borrow against throughout your lifetime.
  • Guaranteed death benefit amount: When you sign up for your insurance, your death benefit is fixed and will remain the same as long as the policy is valid.
  • Predictable premium payments: Your premium is likewise set at the time of issuance and will not change over time.
  • Tax-free loans: Policy loans are not taxed, while withdrawals that exceed your contribution to the cash value are.

Disadvantages explained.

  • More costly than term life. Whole life premiums are often much higher than term rates since the insurance builds cash value and insures you for the rest of your life.
  • Cash value may develop slower than other insurance. The growth rate of your whole life policy’s cash value is set when you purchase it, however returns on other forms of permanent coverage (such as universal life) fluctuate depending on variables such as investment returns and interest rate swings, so they may be greater.
  • There is no flexibility to change the premium: Whole life plans, as opposed to universal life policies, do not let you to adjust your premium.
  • There is limited flexibility to change the death benefit: Your death benefit is also determined when the insurance is issued. While you cannot directly enhance the initial death benefit, profits may be used to buy more coverage.

How Much does Whole Life Insurance Cost?

Whole life insurance plans are often more costly than term life insurance. Investopedia study utilizing Quotacy discovered that the average monthly premium for a $500,000 whole life insurance policy ranged from $247 for a 30-year-old girl to $887 for a 60-year-old man.

In comparison, monthly rates for term life insurance vary from $25 for a 30-year-old girl to $241 for a 55-year-old man for the same coverage.

Term Life Insurance Costs

$500,000 CoverageAverage Monthly Cost, MaleAverage Monthly Cost, Female
30 years old$30$25
40 years old$52$42
50 years old$138$101
55 years old$241$180

Whole Life Insurance Costs:

$500,000 CoverageAverage Monthly Cost, MaleAverage Monthly Cost, Female

What Are the Differences Between Universal and Whole Life Insurance?

Universal life insurance and whole life insurance are two forms of permanent life insurance that provide guaranteed death payments during the insured’s lifetime. However, a universal life insurance enables the policyholder to change both the death benefit and the premiums. Higher death benefits need higher premiums. Whole life insurance, on the other hand, does not enable modifications to the death benefit or premiums, which are fixed when the policy is issued.

How Much is Whole Life Insurance?

The cost of whole life insurance varies depending on age, employment, and medical history. Older candidates tend to have greater rates than younger ones. People with a clean medical history often earn better rates than those with a history of health issues. The face amount of coverage also influences how much a policyholder will pay; the greater the face amount, the higher the premium. Also, various businesses charge greater rates than others, regardless of the applicant’s risk profile. It is also worth mentioning that whole life insurance costs much more than term life insurance for the same level of coverage.

What is Modified Whole Life Insurance?

Modified whole life insurance is a kind of permanent life insurance in which premiums rise after a certain time period. Policyholders pay lower premiums than they would for a flat premium insurance in the first few years, but greater premiums in subsequent years. Traditional whole life insurance rates, on the other hand, do not change during the course of the policy.

The Bottom Line

Whole life insurance typically has a fixed premium and death benefit, and gives a guaranteed reward upon the insured’s death, regardless of when they die. A portion of the premiums you pay for a whole life coverage go towards a savings component known as the cash value. These funds are invested with a guaranteed return, and after they have grown enough, you may borrow from or withdraw the cash value tax-free.

This, along with the fact that whole life insurance protects you until death (as long as you pay your payments), provides significant benefits over term life insurance, which only pays out if you die within a certain time period. However, full life insurance is also substantially more expensive.

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