Whole Life Insurance

Whole life insurance is a type of permanent insurance that offers coverage for your entire life. As long as premiums are paid, the insurance company pays out a tax-free death benefit to your beneficiary, when you pass away.

Unlike term life insurance, whole life policies do not have an expiry date. That means you get lifelong coverage. The premiums (the money you pay) for whole life policies are guaranteed and stay the same over your entire life.

Whole life insurance policies also have a savings or investment component. A part of the premiums you pay are invested by the insurance company and the investment returns are available for you to use as cash value.

The accumulation of cash value from a whole life policy can be used to supplement your retirement income, pay for children’s education, or for any other purposes you may want to use it for.

There is no catch or gotcha with whole life insurance. While there are lower-cost alternatives for financial protection, whole life insurance delivers great value as the death benefit is guaranteed. Because of this guaranteed payout, whole life policies are often used for estate planning and covering funeral expenses.

Whole life insurance has many advantages. It provides you with guaranteed, lifelong protection and a death benefit for those you leave behind to cover end-of-life expenses or outstanding loans. Additionally, your policy accrues a cash surrender value that you can access while the policy is in force (or borrow against) after a certain number of years. Lastly, the premiums stay level, so you can budget your monthly insurance premiums accurately for the life of the policy.

One disadvantage of whole life insurance is the elevated premiums. Because this type of insurance protects you for your entire life and retains a cash value, the premiums you pay for coverage are much higher than other types of life insurance.

When you purchase a whole life insurance policy, it requires payment of a guaranteed level (or fixed) premium based on your chosen coverage amount and other personal factors such as your age, gender, smoking status, etc. The premiums can be paid monthly or annually. Some whole life policies also allow you to pay off the entire premium within a limited period.

The premiums paid by you go toward three components:

• One portion accounts for the cost of pure life insurance

• Another portion represents the overhead costs and margin expectations of the insurance company

• Balance premium is invested in a low-yielding stable investment portfolio that accumulates returns. These returns are generated on a tax-deferred basis and are available to be used as cash value during the lifetime of the insured. Most whole life policies will guarantee a rate of return. The cash value from the policy will grow with time, based on the actual (or guaranteed) rate of return. This cash value is tax-deferred and available for you to access, during your lifetime, to meet any planned or unplanned financial needs. Cash value is typically available after a specified number of years, such as after 5 or 10 years.

Once you pass away, the insurance company will pay the death benefit to the beneficiary.

Term life insurance and whole life insurance are different ends of the protection spectrum. A term life insurance policy is temporary in nature, whereas whole life insurance is the opposite. It is insurance coverage that offers a lifelong policy term as long as your policy premiums are paid.

While term policies provide coverage for temporary needs like diminishing mortgage debts and providing for dependents, whole life or permanent life insurance policies can provide for permanent needs. This can include providing for final tax expenses, funeral arrangements, or leaving a tax-advantaged legacy behind for children or grandchildren.

Yes, you can convert term life insurance to a whole life insurance policy that provides coverage for life, though there may be some restrictions.

Convertibility is a feature many insurance providers offer on their term insurance policies. It lets you convert your term life insurance into a whole life policy before you reach a certain age (like 65 years old).

While it may be less expensive to get a brand new whole life insurance policy, it’s great to have a fallback plan, like convertibility options, in case you don’t qualify for the new insurance plan of your choice.

How much whole life insurance coverage you need depends on how you plan to use it. If it's your sole life insurance coverage, you may need a policy that covers hundreds of thousands of dollars, if not more. If you are using it as part of a ladder strategy or simply to cover end-of-life expenses, that number could reduce significantly.

Determining your overall insurance needs is a bit simpler. A common rule of thumb for how much life insurance you need is to choose 8-10 times your yearly income as your death benefit. However, for a more precise answer, take into account any debts you have, your family's living expenses, future education needs of your children, plans for end-of-life expenses and any other allocations (e.g. charitable donations) you may want to make.

Whole life insurance rates tend to be more expensive than term life insurance for two reasons: the payout is guaranteed at the end of your life and there is a savings (or investment) component to the policy.

Additionally, as with other types of insurance, the older you are, the more whole life coverage costs. As we know, humans don’t live forever, so the risk of passing away gets higher as we age. This creates a financial risk for the insurance company as they have less time to collect premiums from you if you’re older before making the guaranteed death benefit payment to your beneficiaries.

Because of this financial risk, they make premiums higher than if they had years to collect policy premiums.

As we mentioned before, your whole life insurance policy accrues cash value as you pay your premiums over the years. After a certain amount of time has passed, you can surrender the policy for a predetermined amount of money. This sum is called the cash surrender value. So, yes, you can cash out a whole life insurance policy.

How long does it take for whole life insurance to build cash value?

While every insurer is different, it generally takes at least 10 years before your whole life insurance policy builds enough cash value for you to be able to take advantage of it.

What happens to the cash value of a whole life policy at death?

If an insured person dies while there is outstanding cash value associated with their whole life policy, those additional funds are also distributed to the beneficiary.

There are two subsets of whole life insurance:

• Non-participating permanent life insurance: policyholders do not receive dividends and thus premiums are guaranteed, level, and generally lower.

• Participating permanent life insurance: where policyholders receive dividends – typically annually – on the premiums they give to their insurance provider. They “participate” in the provider’s investments and have some control over how the funds are handled.

Whole life insurance premiums can be paid monthly or annually. But beyond that, there are alternative payment structures for whole life insurance coverage:

• Life Pay Whole Life Insurance: insurance that covers you for your entire life with a built-in savings component. You pay insurance premiums for this coverage for the rest of your life.
• Limited Pay Whole Life Insurance: the same coverage as above, but you only make a premium payment for a set period of time. Because of this limited pay period, the premiums are typically higher.

A 20 pay whole life policy is a limited pay whole life insurance product where you pay the entirety of the premiums within the first 20 years of your policy.

Similarly, a 10 pay whole life policy is a limited pay whole life insurance policy where you pay the entirety of the premiums within the first 10 years of your policy.

Depending on the insurance provider, limited pay whole life insurance policies can also be structured as 15 pay or have the policyholder pay premiums until the age of 65.