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. And if your 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 entire 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 decrease4
  • The premium payments are guaranteed never to increase
  • 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 cash value that is guaranteed to grow – tax-deferred – at a given rate. The cash value feature exists to help maintain coverage indefinitely and provides a number of other financial benefits. A portion of each premium dollar covers the "cost of insurance" (in other words, it pays for the death benefit). The other part of your premium goes into your cash value, where it grows at a fixed rate, not subject to taxes. 

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 policyholders 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. Dividends7 can increase your account value beyond the guaranteed growth rate. 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 that happens, the policy's cash value 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-advantaged 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. 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 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 stay 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 can be at least five times more expensive than a term policy with the same benefit amount.

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. 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 better 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 representative who can help. 

Frequently asked questions about whole life insurance

What is whole life insurance, and how does it work?

Whole life insurance provides permanent life-long coverage that can't be canceled as long as your life insurance premiums are paid. These policies also build cash value in a tax-advantaged way, which can be used while you are alive for policy loans, to supplement retirement income, and for other life events. It can also be used as part of an estate plan, for example, to pay for estate taxes.

What happens when a whole life insurance policy matures?

Whole life policies have a maturity date, typically defined as the day the policyholder turns 100 or 121. Cash values are calculated to equal the benefit amount at that time

What is the catch with whole life insurance?

There is no "catch," but there are pros and cons to buying life insurance of any kind. Coverage is an essential part of a financial strategy because it can help minimize the financial burden when a breadwinner dies. Whole life is the simplest kind of permanent policy, with guarantees for the death benefit amount, premium costs, and cash value growth. Compared to universal life (another form of permanent coverage), whole life offers more guarantees but less payment flexibility. Compared to term life, it provides life-long coverage and cash value; but whole life insurance rates for a given level of death benefit are typically higher.

feature
Get a whole life insurance quote.
Go now

Disclaimer

This article is for informational purposes only. Guardian may not offer all products discussed. Please consult with a financial professional to understand what life insurance products are available for sale.

1 All whole life insurance policy guarantees are subject to the timely payment of all required premiums and the claims paying ability of the issuing insurance company. Policy loans and withdrawals affect the guarantees by reducing the policy’s death benefit and cash values.
2 Some whole life polices do not have cash values in the first two years of the policy and don’t pay a dividend until the policy’s third year. Talk to your financial representative and refer to your individual whole life policy illustration for more information.

3 Permanent life insurance consists of two types: whole life and universal life. Cash value grows in a participating whole life policy through dividends, which are declared annually by the company's board of directors and are not guaranteed. Cash value grows in a universal life policy through credited interest and decreased insurance costs. The cash value of both policy types benefits when the policyholder pays an amount above the required premium.

4 Guardian, its subsidiaries, agents and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation.

5 The Index Participation Feature (IPF) is a rider available with select Guardian participating whole life policies. With the new IPF, policyholders can now allocate between 0% and 100% of the cash value of paid-up additions (PUA) to the IPF each year. The IPF provides an adjustment to the dividend paid under the policy. This adjustment, subject to the cap rate (currently 11%) and floor (currently 4%), may be positive or negative based on the S&P 500 price return index performance. Adverse market performance can create negative dividend adjustments which may cause lower overall cash values than would otherwise have accrued had the IPF rider not been selected. While the adjustment provided by this rider is affected by the S&P 500 price return index, it does not participate in any stock or equity investment of the S&P 500 price return index. The cost of the IPF rider is currently 2% with a guaranteed rate of 3% on the IPF portion of the policy. Policy loans against, or withdrawals of, values allocated to the IPF could negatively impact rider performance. Selection of the IPF may restrict the use of certain dividend options.

6 The S&P 500 price return index is a product of S&P Dow Jones Indices LLC (“SPDJI”) and has been licensed for use by The Guardian Life Insurance Company of America (Guardian). Standard & Poor’s® and S&P® are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by Guardian. The Index Participation Feature (“Product”) is not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, or their respective affiliates, and none of such parties make any representation regarding the advisability of investing in such Product nor do they have any liability for any errors, omissions, or interruptions of the S&P 500 price return index.

7 Dividends are not guaranteed. They are declared annually by Guardian’s Board of Directors.

8 Policy benefits are reduced by any outstanding loan or loan interest and/or withdrawals. Dividends, if any, are affected by policy loans and loan interest. Withdrawals above the cost basis may result in taxable ordinary income. If the policy lapses, or is surrendered, any outstanding loans considered gain in the policy may be subject to ordinary income taxes. If the policy is a Modified Endowment Contract (MEC), loans are treated like withdrawals, but as gain first, subject to ordinary income taxes. If the policy owner is under 59 ½, any taxable withdrawal may also be subject to a 10% federal tax penalty.

9 Universal Life Insurance may lapse prematurely due to inadequate funding (low or no premium), increase in cost of insurance rates as the insured grows older, and a low interest crediting rate. This does not apply to universal life policies which have a secondary guarantee, but if the secondary guarantee requirements are not met the policy will most likely lapse.

10 Riders may incur an additional cost or premium. Riders may not be available in all states.

2021-125292  20230930