While all whole life policies share traits, there are many differences among them. If you’re shopping for a life insurance policy, this article will help you understand the following things:

How does a whole life policy work, compared to other types of policies?

To answer that question, we’ll start with a quick review of what whole life insurance is, compared to two other popular types of life insurance – term and universal life insurance. We’ll start with the simplest form of life insurance.

Term life insurance

A term life insurance policy provides coverage for a specific term or period of time, typically between 10 and 30 years. It is sometimes called “pure life insurance” because unlike whole life insurance, there’s no cash value to the policy – it’s designed purely to give your beneficiaries a death benefit payout if you die during the term.

Whole life insurance

A whole life policy is permanent coverage that comes with other guarantees 1 and tax benefits 2 that lasts your entire life, dependent on a timely payment of premiums. There are other types of permanent coverage as well, but whole life is the simplest. Unlike term, it’s not a “pure life insurance” product because it includes a cash value: A portion of your premium dollars are invested and this sum grows over time on a tax-deferred basis, so you don’t pay taxes on the gains.

It takes a few years for that cash value to grow into a useful amount, 3 but once that happens it can provide valuable benefits that you can use while you’re still alive: For example, you can borrow money against your policy’s cash value, use it to pay your premiums, or even surrender it for cash to live on in retirement or to supplement a college education or help with a down payment on a house.4

While whole life insurance is relatively simple compared to the next option – universal life insurance – there are still a lot of variables and options which need to be considered when shopping for a whole life policy.

How cash value is determined

Every policy and provider has different ways of calculating cash value growth. In fact, a Guardian whole life policy offers eight different cash value options – more than any other insurer. For example, some of the cash value can be linked to the S&P 500 index. With some companies, such as Guardian, whole life policies can also earn annual dividends (a portion of the insurer’s profits) that can increase your cash value.6 While dividends are not guaranteed, Guardian has paid a dividend to its participating whole life policyholders since 1868.

The most widely selected dividend option is to apply dividends to purchase paid-up additions (PUA).A paid-up addition is guaranteed permanent, paid-up participating life insurance. This option provides you with a growing cash value and death benefit that’s guaranteed once purchased. Under this option, each year as dividends are declared, more and more PUAs are purchased, which in turn earn their own dividends. Over time, the accumulation of PUAs can help to offset the effects of inflation by providing a greater level of death benefit protection and accumulated cash values. These dividend accumulations can also be withdrawn tax free anytime, up to the policy basis.

In addition to PUAs, Guardian currently offers these other dividend options:

  • Receive it in cash
  • Reduce the whole life policy premium
  • Purchase additional term insurance
  • Allow it to accumulate with interest
  • Apply to outstanding policy loans

Universal life insurance

As we’ve noted, whole life and universal life are both permanent forms of life insurance with a cash value component. However, whole life is a simpler type of policy for three main reasons:

  • The premium remains the same for life
  • The death benefit is guaranteed
  • The cash value grows at a guaranteed rate

Universal life is more complex because cash values and premiums can fluctuate. In a universal life insurance policy, the cash value growth is dependent on an interest rate benchmark that can vary depending on the policy. Under the right conditions, there is potential for more growth and flexibility. However, the premiums you pay and how much you tap into the cash value (if at all) also affects overall growth. That variability creates a level of risk: If a universal life policy becomes underfunded — meaning the amount of premiums paid in are less than the current premium charges – that difference is then deducted from the cash value; if the cash value falls below a certain point, your policy can lapse. 8 With a universal life policy, it’s important to review your policy at least annually with your financial representative to make sure it’s still on target to meet your needs.

Is a whole life insurance policy the best type for your needs? 

The answer really depends on what kinds of financial protection you and your family need. If you just want a death benefit to help with finances while your children are still at home, a term life policy from a financially-sound insurance company may be enough. But if you’re interested in more constant, lifetime protection you should look into a permanent policy such as whole life insurance. Before deciding on either type of life insurance policy, you should consider the following:

Do you want to ensure you get something in return for your premium dollars?

A term life policy will help provide confidence that your family is protected – but the chances are your family may never actually get a payout, because a term policy is a “pure” life insurance product that only pays a death benefit. By contrast, a whole life policy has an added cash value component, so as long as you keep paying premiums, you or your beneficiaries are guaranteed to receive either a death benefit or access to cash value in the future.

Do you want to keep your premium costs level over time?

If you buy a term policy every 10 years, your premiums will typically go up substantially from one policy to the next. With a whole-life policy you’ll have “level premiums”: the amount you pay the insurance company each month will never go up. That can make premiums feel much more affordable over the long run.

Do you want to provide a fixed benefit for your beneficiaries?

With permanent (whole or universal) life insurance coverage, you can depend on a guaranteed amount of money – the death benefit – going to your heirs or whatever cause or charity you designate as a beneficiary. This lifetime protection will never go away as long as premiums are paid.

Do you want a source of savings for retirement?

The cash value in a whole life insurance policy grows and can be used in a tax-advantaged manner as part of your retirement’s financial mix. The cash value component is insulated by fluctuations of the market – and the money may be tax-free when you start withdrawing it. While withdrawals will impact the amount of money you leave to your beneficiaries, it is a guaranteed asset that can give you more options for an uncertain future.

Are you concerned about an estate planning strategy?

A whole life policy can be ideal for estate planning because it can provide income tax-free cash to heirs. It may also be an effective tool to provide liquidity for final death expenses, including estate and/or inheritance taxes. If the policy is owned by a third-party other than the insured, for example an irrevocable life insurance trust, the death proceeds should avoid inclusion in the insured's estate for purposes of estate taxes.

Estate planning can be complex. It is always recommended that you consult with your own attorney regarding estate planning matters including possible tax consequences. Life insurance death proceeds may also be used to provide a meaningful donation to a favorite charitable organization.

If you said yes to any of the above questions, a whole life policy could be an option to consider for your needs.

How to buy whole life insurance

While it’s the simplest form of permanent life insurance, a whole life insurance policy is still a complex financial instrument. That’s why you should contact an experienced life insurance agent or financial representative who can help you get the right policy by guiding you through the key decisions you’ll need to make.

1. How much coverage?

First of all, you need to think about how much life insurance coverage you need, i.e., the amount of death benefit. There are many things to consider when determining how much life insurance you need, but the key items include:

  • How much money would your beneficiaries need — both short and long-term. What immediate expenses would they need to cover if you passed away? And how much money would they need for the future?
  • If you have children who are still at home, how much will it take to raise them and send them to college?
  • If you have a spouse, do you want the benefit to help cover his or her needs through retirement?
  • Do you have a special needs child that needs to be provided for?

2. Which riders?

As we noted earlier, every whole life policy has a number of optional provisions called riders. 9 Some popular riders include:

  • Enhanced accelerated death benefit – lets you access funds from the death benefit if you have a serious or “terminal illness”10
  • Disability waiver of premium – allows you to skip paying premiums if you have a disability11
  • Guaranteed insurability – allows you to purchase additional coverage later on, without having another medical exam or providing other evidence of “insurability” or good health
  • Accidental death benefit – an additional benefit amount paid to beneficiaries if you die from something other than natural causes

3. Which policy?

Once you have a basic understanding of how much coverage and which provisions you need, it’s time to start evaluating specific policies.

  • Look at how the cash value component is calculated. Compare rates between companies, look at performance projections, and find out if that growth is guaranteed.
  • Look at the insurer’s financial strength rating (FSR). There are reliable independent sources for financial strength ratings (FSRs) which you can find online, including A.M. Best, Fitch Ratings, Moody’s, and Standard and Poor. For an example of the kinds of ratings to look for, here are Guardian’s financial strength ratings.12
Agency   Guardian Financial Strength   Outlook
A.M.Best A++ (Superior - highest of 15 ratings)
Upgraded in November 2008 from A+   
Fitch AA++ (Very Strong - 2nd highest of 21 ratings) 
Upgraded in October 2007 from AA   
Moody's  Aa2 (Excellent - 3rd highest of 21 ratings)
Since 2003
S&P  AA+ (Very Strong - 2nd highest of 22 ratings)
Upgraded in July 2008 from AA 

*Guardian's ratings profile has been strong across all rating agencies over the last 10+ years

4.  How much?

It’s time to get a quote (or quotes). The actual price you pay for your policy depends on a number of factors: Your age, health, and life expectancy are key and will be evaluated as part of an underwriting process that requires a medical exam. Your desired coverage amount and optional riders will also factor into the cost.

As an example, you can also get an online quote for term life insurance using our calculator.

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Frequently asked questions about getting a whole life insurance quote

Why do people buy whole life insurance?

Whole life insurance is a form of financial protection that can help protect your family for your entire life. From the first day you’re covered, there’s a death benefit that can help provide for your family’s needs if something happens to you. And over time, the policy builds cash value which can provide a number of financial protections and benefits.

How does “cash value” work?

Every time you pay a premium, a certain portion is set aside and invested. Over time, it can grows tax-deferred into a meaningful sum of money: you can borrow against it; you can use it to pay for all or a portion of your premiums later on; or you can use your cash value to help pay for living expenses or to supplement your retirement. 

Does whole life insurance cost more than term life insurance?

Whole life, like other permanent life insurance, may appear to be more expensive than term insurance. However, over a lifetime whole life insurance may be more economical because the premiums do not increase with age. A whole life policy can also provide extra value because you’re building up cash value along the way.

Can I get whole life insurance if I have HIV?

Guardian offers whole life policies to a healthy subset of individuals living with HIV under certain conditions:

  • Between ages 20 and 60
  • On highly active anti-retroviral therapy for two or more years with favorable lab results
  • Free of any AIDS-defining illnesses
  • Under the care of a doctor specializing in HIV
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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 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.

3 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

4 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.

5 The Index Participation Feature (IPF) is a rider available with select Guardian participating whole life policies. With the 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 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 not been selected. While the adjustment provided by this rider is affected by an external index, it does not participate in any stock or equity investment of the external index. Rider Form Number: 15-IPR, 15-IPR MA. 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. 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 Dividends are not guaranteed. They are declared annually by Guardian’s Board of Directors. The total dividend calculation includes mortality experience and expense management as well as investment results.

7 Paid-up Additions (PUA) are purchases of additional insurance (death benefit) that have a cash value. These purchases are made with dividends and/or a rider that allows the policyholder to pay an additional premium over and above the base premium. This creates the growth of death benefit and cash values in a participating whole life policy. Adding large amounts of paid-up additions may create a Modified Endowment Contract (MEC). A MEC is a type of life insurance contract that is subject to last-in-first-out (LIFO) ordinary income tax treatment, similar to distributions from an annuity. The distribution may also be subject to a 10% federal tax penalty on the gain portion of the policy if the owner is under age 59 ½. The death benefit is generally income tax free.

8 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.

9 Riders may incur an additional cost of premium. Riders may not be available in all states.

10 The Accelerated Death Benefit for Long Term Care Services Rider is marketed as Guardian’s Long-Term Care Rider. The Accelerated Death Benefit for Long Term Care Services Rider is not available in all states. Rider provisions and features may vary by state. The LTC Rider is an optional Rider available at an additional premium. Guardian’s Long-Term Care Rider is issued on Policy Form: 14-L95, 14-L99, 14-L121, 12-L20, 12-L65 and 11-WL10.

11 A Waiver of Premium rider waives the obligation for the policyholder to pay further premiums should he or she become totally disabled continuously for at least six months. This rider will incur an additional cost. See policy contract for additional details and requirements.

12 Ratings are as of December 2019 and are subject to change. Financial information concerning Guardian as of December 31, 2019, on a statutory basis: Admitted Assets = $62.2 Billion; Liabilities = $54.6 Billion (including $46.5 Billion of Reserves); and Surplus = $7.6 Billion.

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