Whole life insurance: What it is and how it works
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No single type of life insurance is right for every person. But if you value strong financial guarantees — and you're looking for predictability in a world that is anything but — then you may find yourself drawn to the benefits of whole life insurance. Whole life is one of several permanent life insurance policies which provide lifelong insurance protection, wealth-building cash value, and the most guarantees available in a life insurance policy.1,2 This article can help you understand:
Get a whole life insurance quote.
How a whole life insurance policy works
Whole life is the simplest form of permanent life insurance — but it's still somewhat more complex than a term life insurance policy. Term life is sometimes called "pure life insurance" because there's no cash value to the policy: it's designed to provide a death benefit for a specific period (e.g., 5, 10, 20, or even 30 years). However, once the term is over, there's nothing left. In a sense, it's like auto insurance where you pay premiums for a term of six months or a year, and if nothing happens, the insurance company doesn't pay anything out – and you don't get anything back. But unlike most auto insurance, coverage for a 10, 20, or 30-year term life insurance policy doesn't renew automatically. After the term is over, you have to reapply for coverage if you still want it – and your life insurance quotes will typically be higher because you're older. Cost-effective health has deteriorated; you may not be able to find affordable coverage at all.
People who want the assurance of lifelong insurance protection should consider a permanent life insurance policy — either whole life or universal life insurance.3 But as we noted, whole life is the simpler of the two, and it can provide the most guarantees:
The guaranteed death benefit is payable to beneficiaries as an income tax-free lump sum from the first day the policy is in effect and is guaranteed never to decrease.4
The premium payments are guaranteed never to increase and remain fixed for the entire life of the policy.
The cash value is guaranteed to grow at a set annual rate.
What is the cash value, and how does it grow?
A whole life insurance policy is also a life-long financial asset because it provides a cash value component that is guaranteed to grow — tax-deferred — at a given rate. The cash value feature, also known as the cash value component of whole life insurance, exists to help maintain coverage indefinitely and provides a number of other financial benefits. A portion of each premium dollar payment covers the "cost of insurance" (in other words, it pays for the death benefit). The other part of your premium goes into your policy’s cash value, where it grows at a fixed rate, not subject to taxes. Over time, the policy’s cash can exceed the total premiums paid into the policy.
The cash value amount accumulates over time, providing a source of funds that can be accessed during your lifetime. This cash value account works similarly to a savings account, allowing you to borrow against or withdraw funds as needed.
Whole life insurance is among the lowest-risk assets available because the cash value growth rate is guaranteed no matter what happens to the markets. However, different life insurance companies have different ways of calculating that rate. Guardian actually offers whole life policyholder's different options: for example, some of your account value can be linked to the S&P 500 index.5,6 Whole policies from a mutual insurance company (such as Guardian) can also earn an annual dividend — a portion of the company profits. The growth of the policy’s cash value is influenced by the total premiums paid and any additional dividends. Dividends can increase your account value beyond the guaranteed growth rate.7 While insurers don't guarantee dividends, Guardian has paid them every year since 1868.
What can you do with cash value?
In the first years of a policy, cash values tend to be low while the insurer covers expenses and begins to invest premiums. It typically takes a few years to grow into a useful amount, but once it happens policy has accumulated enough cash value, it can be a valuable financial asset that can provide several advantages. For example, it can let you:
Purchase additional coverage
Take out a low-interest, tax-efficient policy loan against your cash value8
Use the cash value to pay most or all of your premiums, helping to keep the policy in effect in later years
Use all or a portion of the cash value to supplement your retirement income
Do you need a medical exam to get a whole life policy?
The life insurance company will typically have you complete a medical underwriting process to determine your risk to insure. This can include a questionnaire with medical questions and a medical exam. In some cases, the insurer may also require certain medical records to verify your health history. If you would rather apply without medical tests, there are policies available. However, they typically cost more because the insurance company has to assume you have health issues. These no-medical-exam whole life insurance policies typically have limited coverage amounts, such as a $50,000 cap, and are often marketed to seniors to pay for final expenses.
Pros: The advantages of whole life compared to other coverage
Lifelong coverage | From the first day the policy is in effect, it provides an income tax-free death benefit to help protect your family's financial wellbeing. But unlike a term policy, that financial protection lasts a lifetime – it can't be canceled as long as premiums are paid. |
Cash value | Unlike term life, whole life policies provide cash value that grows tax-deferred at a guaranteed rate, offering financial confidence and support for your beneficiaries. Universal policies also have cash value that grows tax-deferred, but the rate isn't guaranteed. |
Policy loans | You can take out tax-advantaged, low-interest policy loans against the value of your policy.* |
Asset flexibility | Like other permanent policies, you can use the cash value to pay premiums, increase the benefit amount, or even use your policy to supplement income in retirement. |
Dividends | With a mutual company (like Guardian), a whole life insurance policy can earn dividends. These can increase a policy's value beyond the growth rate guarantee.** |
Level premiums | Like most term policies, the premiums remain the same for the life of the policy. Universal policies feature flexible premiums that can be adjusted within a certain range.9 |
The most guarantees | The income tax-free death benefit is guaranteed never to decrease. The cash value is guaranteed to grow at a set annual rate. Your monthly or yearly premiums are guaranteed never to change. |
Tax benefits | Like other forms of coverage, the death benefit is paid income-tax-free to beneficiaries. And like a universal life policy, the policy's cash value grows on a tax-deferred basis, so no taxes are owed on current earnings or interest. |
Customized protection | Your policy can be tailored to your needs with life insurance riders — optional features that can be added to a policy — such as an accelerated death benefit to help pay for end-of-life care.10 |
Cons: The disadvantages of whole life compared to other coverage
Cost | Whole life insurance costs more than other types of coverage: premiums are typically higher than those for universal life, and it is significantly more expensive than term life insurance.*** |
Complexity | While a whole life policy is simpler than a universal policy, both types of permanent policies are more complicated than a "pure life insurance" term policy. |
Level premiums | While whole life premiums are stable and predictable (which can be an advantage, they are also inflexible. Some whole life policies require premium payments for a certain number of years, while others require payments for the insured’s entire lifetime. Universal life features flexible premiums, which can be helpful to people with fluctuating incomes. |
Growth rate | The cash value is guaranteed, making it a lower-risk asset; however, that growth rate may be lower than other options, which typically carry more risk, including universal and variable universal life insurance policies. |
Is whole life insurance right for you?
Compared to other forms of coverage, whole life offers protection with many guarantees. But if you've been looking at term life insurance quotes, you probably know that whole life can cost significantly more. How much more? That's determined by a number of factors, including the coverage amount, policyholder age, gender, and health status. So, it's impossible to know your exact monthly payments before applying for coverage and going through the underwriting process. However, a recent survey by the Top Whole Life insurance blog listed actual monthly premiums from some of the top life insurance companies for recent applicants in excellent medical condition. Here are some of the key examples:
Male Non-Smoker $50,000 policy | Female Non-Smoker $50,000 policy | Male Non-Smoker $100,000 policy | Female Non-Smoker $100,000 policy | |
|---|---|---|---|---|
Age 20 | $40.24 | $34.19 | $65.86 | $55.16 |
Age 30 | $51.68 | $45.11 | $89.44 | $80.40 |
Age 40 | $72.95 | $62.60 | $135.63 | $109.88 |
Age 50 | $115.71 | $91.70 | $216.80 | $172.78 |
Premium cost per month. Source: Top Whole Life How much does whole life insurance cost? Rates & charts
A life insurance professional can help you decide
Your situation is unique, and it's good to talk things over with a financial professional who has helped others get whole life insurance coverage. They can help you weigh the pros and cons of all your life insurance options, explain different cash value accumulation methods, and decide how much coverage you need. If you decide whole life is right for your needs, they can provide the guidance needed to tailor the contract to your needs and compare life insurance quotes. If you don't know a life insurance agent, ask friends or colleagues for a recommendation. Or Guardian can connect you to a financial professional who can help.