Decide what kind of protection and benefits you want

Life insurance can be one of the most powerful financial tools available to the average person: In addition to providing critical financial support to your family if you pass away, it can also be a source of supplemental retirement funds, part of a tax strategy, a collateral asset, a business continuity resource, an estate planning tool, and more3,4. It all depends on what you need from a policy – and the type of policy you get. 

What is a whole life insurance policy? It’s the simplest form of permanent life insurance, so named because it provides coverage that lasts a lifetime. However, it’s not the most widely purchased type of coverage. Most policies are term life insurance that lasts for a specific (and limited) period of time – typically between 10 and 30 years. Unlike term, whole life policies include a cash value component: A portion of your premium dollars can increase over time on a tax-deferred basis. 

Unlike other forms of permanent life insurance, whole life policies offer three important guarantees: 

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

A policy’s cash value can provide a number of benefits that you can use while you’re still alive. It takes a few years to grow into a useful amount, but once that happens, you can borrow money against it, use it to pay your premiums, or even surrender it for money to live on in retirement. 

Whole life and other types of permanent coverage (such as universal life) provide a number of financial advantages compared to term life, but those benefits – and the certainty of a payout – come at a price: permanent policies can cost substantially more than a term policy with the same level of coverage. Is it worth the money? Before deciding, consider: 

Do you want permanent protection or temporary protection?

The biggest drawback to a term life insurance policy is the fact that it only lasts for a limited period of time – typically between 10 and 30 years. While you can get another term policy after the current one expires, you’ll be older and the cost may be substantially higher. Also, once you reach a certain age – or if you are diagnosed with a health condition – the cost of a new term policy could become prohibitive. If you want lifelong protection, you may need to consider permanent life insurance.

Are you only looking for a death benefit?

The death benefit – the amount of money paid to beneficiaries when the policyholder dies – is the most important part of any life insurance policy. But for some people, it’s the only thing they want from life insurance. They’re not looking for cash value or the other advantages life insurance can provide. Term life insurance may be the best choice for these people because it is a “pure” insurance product that provides the highest death benefit per premium dollar – as long as they are willing to have temporary coverage.

Are you looking for a stable asset that increases at a guaranteed rate? 

A whole life policy has cash value that grows tax-deferred at a specific guaranteed rate every year. 

How do you feel about paying premiums and potentially never realizing a payout?

While term life insurance can help provide assurance your loved ones will have the money they need if you die, many people have an objection to buying it: they don’t like the idea of paying premiums for 10, 20, or even 30 years when there is a chance there will be no payout or financial benefit at the end. If you want a policy that builds in value, you may want to consider a permanent life insurance policy.

Do you have business, estate planning, or other special needs?

Many older people use life insurance policies as a tax-advantaged tool for passing wealth on to the next generation. Business owners use it to help ensure operational continuity or to fund buy-sell agreements that let surviving partners pay a deceased partner’s family for their share of the business. The temporary coverage period and narrow financial scope of term life make it less useful for specialized situations such as these.

Consider the pros and cons of other life insurance options

There are a lot of ways to evaluate the relative benefits of whole life insurance and other types of life insurance. To make the process more straightforward, we’re dividing it into two parts: First, we’ll compare permanent whole life to temporary term life insurance, then we’ll compare it to other forms of permanent life insurance. 

Compared to a term life insurance policy, whole life provides more comprehensive financial protection that lasts your entire life: It can never be canceled as long as premiums are paid; the death benefit will never go down; the cash value will always grow at a guaranteed rate; also, you or your beneficiaries are assured of an eventual payout, so you may feel you’re getting more value for your premiums. On the other hand, if you just need a death benefit to protect your family’s finances for a limited time – for example, while children are still at home – a term life policy can be a less complex, lower-cost choice. But once your policy’s term is over, it will have no value. If you want continued protection, you’ll have to apply for a new policy with potentially higher premiums – because you’ll be older. 

If you’re evaluating the two types of policies strictly for their cash value potential, the choice is simpler: whole life has long-term cash value benefits available, while a term life policy has no cash value potential. If you purchase your whole life policy from a mutual company (such as Guardian), your policy may also earn dividends. Mutual companies are actually owned by their policyholders, who may receive a portion of the insurer’s profits in the form of a dividend. These can increase your cash value beyond the guaranteed growth rate. While annual dividends are not guaranteed, Guardian has paid them every year since 1868.

Here’s a summary of some of the other features and differences between the two types of policies:

Policy Feature Term Life Insurance Whole Life Insurance
Initial cost Low Likely more for the same benefit level, but as cash value builds, it can be used to pay premiums. 
Cost over time Renewal cost increases with age Cost never rises
Cash value component No Yes - accumulates over time
Permanent coverage  No Yes
Length of coverage Typically 10-30 years Lifetime coverage (as long as premiums are paid)
Health exam required Yes Yes
Cost can decrease over time No Yes- cost can be offset as cash value builds (typically after 12+ years)
Eligible for company dividends No Yes - withdraws and loans are allowed (but if unrepaid, this can reduce the death benefit)
Guaranteed death benefit Yes Yes
Used for estate planning strategies Not typically Yes
Policy structure and provisions Relatively simple More simple

Whole life vs. universal life:  A universal life policy – the other main type of permanent coverage – offers more flexibility but fewer guarantees5. Both types of permanent coverage provide tax-advantaged, wealth-building cash value and life-long coverage, but there’s a key difference: with universal life, the premiums are flexible, allowing you to raise or lower your payments within certain limits. That can have appeal in an evolving economy, where people find their incomes to be less stable than they once were. Many people may not want to commit to fixed payments, and premium flexibility can make the advantages of permanent life insurance more easily attainable. However, that flexibility is offset by the fact that universal life offers fewer guarantees: minimum premium payments can reduce cash value growth and can erode its value, eventually resulting in a need to pay more money in later years to keep the same level of coverage or death benefit6. Also, universal policies are somewhat more complex than whole life insurance policies, and they need to be managed or at least reviewed periodically to ensure that money in the cash account remains positive.

In terms of cash value potential, cash value growth in a standard universal life policy tends to be comparable to that in a whole policy: it is guaranteed to grow at a specified minimum interest rate, but can grow faster depending on the insurance company’s performance. However, universal life insurance policies are not eligible to earn dividends, even when issued by a mutual company. There are, though, types of universal policies are available which can provide even greater growth potential (albeit with fewer guarantees) – or lower premiums: 

Indexed universal life – In these insurance policies, cash value growth is tied to the performance of an index such as the S&P 500 Index7, with caps for minimum and maximum rates of return8,9. For example, in a year where the index is up 20%, your money may only see a 10-12% gain. Conversely, if your chosen index is negative for the year, your cash value will stay the same or even grow slightly (depending on the specific terms of the indexed policy). Each insurance company has its own selection of indices available and you may be able to choose more than one. You may also be able to allocate a portion of your cash value to a fixed-rate interest account. 

Variable universal life – This is similar to an indexed policy, but instead of investing in a broad index like the S&P 500 or Russell 2000, you have the option to tie cash value growth to grouped investment funds10. These policies are sold by prospectus and the insurance company gives you the performance history and fee information, and you can decide how much of your cash value to invest in each option. Note that there is typically more risk in a variable policy than an indexed policy – your cash value can actually decrease if the funds you select do poorly.

Guaranteed universal life

This type of life insurance policy, also called GUL, offers little or no cash value or surrender value. Instead of providing cash value growth, this policy is structured to provide permanent coverage with typically lower premiums compared to whole life insurance.

Is whole life insurance an asset you should consider?

A whole life policy can be a complement to your financial strategy. Whole life can offer long-term protection, especially when it is issued by a long-established insurance company with high financial strength ratings* (Guardian has been operating since 1860 and has strong ratings)11. The guaranteed death benefit– along with the many other protections and tax advantages of permanent life insurance – can make it an important part of a financial strategy. But is it right for you?

The best answer we can offer is maybe. A more definitive answer would have to account for your personal situation, family obligations, overall financial picture, personal investment style, and even beliefs about how to save money. But the fact that you’ve read this far indicates that whole life is an interesting possibility. The best next step is to speak with an experienced financial professional who will listen to your needs and dig deep to learn more about your situation. Then they can help you decide how much coverage may be right for you and guide you through the various life insurance options that may fit your needs. How do you find such an experienced professional? Ask a friend or colleague for a recommendation. Or, we can put you in touch with a Guardian professional.

Frequently asked questions about the value of whole life insurance

Is whole life insurance better than term?

A term policy will typically give you a larger death benefit for each dollar paid in premiums. On the other hand, a whole life policy offers benefits a term policy may not: it provides coverage that lasts your entire life, plus a cash value component that is guaranteed to grow over time.

What are the advantages and disadvantages of whole life insurance?

Compared to a term policy, a whole life policy is typically more expensive and complex, in part because it’s designed to protect you for a lifetime. Compared to other forms of permanent insurance (i.e., the different kinds of universal life insurance), whole life insurance policies offer greater guarantees, less complexity, and the potential for dividends if bought from a mutual company. However, universal life policies offer premium flexibility and more investment options, with the possibility for greater upside potential – and risk.

What is the downside of whole life insurance?

A whole life insurance policy can be a powerful and highly customized financial instrument that can provide numerous protections, guarantees, and benefits. It can be a complement to your financial strategy, but it may not be right for everyone. Before buying, you need to understand how it works and what it can do, then work with an experienced financial professional to ensure you get the right policy for your needs.

*There are several independent companies that determine the financial strength ratings of insurance companies by applying rigorous measures to ensure their ability to meet obligations.

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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 Dividends are not guaranteed. They are declared annually by Guardian’s Board of Directors. 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 professional and refer to your individual whole life policy illustration for more information.

3 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.

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 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.

6 A Fixed Universal Life Insurance (UL) policy provides a flexible premium, choice of death benefit options, and a guaranteed crediting rate (i.e. 2%). Policy growth is based on adequate funding, increasing crediting rates, and if costs of insurance is lower than expected. If any of the three factors just mentioned are lower than expected (policy funding and crediting rates), and/or higher than expected (cost of insurance), the policy may lapse. 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.

7 S&P 500 Index is a market index generally considered professional of the stock market as a whole. The index focuses on the large-cap segment of the U.S. equities market.

8 Past performance is not a guarantee of future results. Indices are unmanaged and one cannot invest directly in an index.

9 An Indexed Universal Life (IUL) policy is not considered a security. Premium and death benefit types are flexible. It’s crediting rate is based on the performance of a stock index with a cap rate (i.e. 10%), a floor (i.e. 0%), and a participation rate (i.e., 100%). This type of universal life policy may lapse due to low or negative performance of the stock index, inadequate funding, and increasing cost of insurance rates

10 A Variable Universal Life (VUL) policy is considered both life insurance and a security and is sold with a prospectus. Premium and death benefit types are flexible. It’s crediting rate is based on the performance of the underlying investment options provided in the policy. There is no guaranteed interest rate. This type of policy may lapse due to low or negative performance of the underlying investment options, inadequate funding, and increasing cost of insurance rates. See your policy prospectus for more information.

11 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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