We’ve often had clients ask to have whole life insurance explained to them. Whole life insurance offers protection for your entire lifetime as long as you keep up with premium payments. This type of policy is often referred to as “guaranteed whole life insurance” because the insurer promises to keep premiums level throughout the policy’s duration, in the event of your death. As long as the policy has not lapsed, beneficiaries will receive a payout.
Whole life insurance has many benefits that make it a great choice for those who want not only insurance coverage but also an investment vehicle. The cash value component grows over time, providing a nest egg for the policyholder. Additionally, whole life insurance offers tax advantages that can save the policyholder money when they take out money via policy loans or withdrawals.
How Whole Life Insurance Works
While there are other types of permanent life insurance policies, such as Universal Life and Variable Universal Life, Whole Life is very popular due to its death benefit and premium payment guarantees.
Most people are familiar with whole life insurance policies, which provide coverage for the policyholder’s entire life. However, what many people don’t realize is that these policies also have an investment component, known as the cash value, which is like having a high-interest savings account.
A whole life insurance policy is a contract between an insurer and an individual that provides coverage for the insured’s entire life. The policy is unique to the individual, taking into account their mortality risk, desired coverage level, and optional features (for example, a cost-of-living adjustment rider). During the underwriting process, the applicant may undergo a medical exam.
After your underwriting information has been received by the underwriter, your health classification will be established and a premium will be calculated based on the risk you present to the insurer.
How Whole Life Insurance Policies Accumulate Wealth
Once issued, your whole life cash-value account begins to earn tax-deferred interest on the premiums that are diverted to the account. The cash-value account can become substantial over time as a result of the compound interest earnings. They can grow even more if you purchase a participating policy from a mutual life insurance company.
Purchasing a life insurance policy doesn’t just give you and your family financial security in case of your untimely death. It can also provide an additional source of income, through annual dividends paid on its cash value.
While there’s no guarantee that these dividends will be paid every year, most mutual insurers have been doing so for decades, even during wars and periods of economic turbulence. You can use these dividends in different ways, depending on your needs.
The most common methods used for receiving dividends are:
- Receive your dividend payments in cash
- Apply your dividends to reduce future premium payments
- Leave dividends with your insurer to accumulate interest
- Apply dividends toward outstanding policy loans and interest
- Purchase paid-up insurance (paid-up additions)
The Benefits of Whole Life Insurance
Although whole life insurance is considerably more expensive than term life insurance, the living benefits of whole life insurance more than makeup for the additional premiums charged for coverage.
Here are the benefits that are generally offered with a whole life policy purchased from a mutual life insurance company:
| Benefit for the Policyholder | Description |
| An instant estate | Whole life insurance protects your loved ones financially in the event of your death. The death benefit is set aside from the first premium you pay and remains unchanged throughout your lifetime, and your policy has level premiums forever. |
| Tax-deferred growth of the cash account | The cash in your cash-value account grows considerably over time on a tax-deferred basis. |
| Tax-exempt death benefit | The death benefit in your policy is generally paid to your designated beneficiary tax-free. |
| Access to your cash value via withdrawals | Cash values in your whole life policy can be accessed and withdrawn tax-free, as long as the withdrawal does not exceed the cost basis. This is known as the First-In-First-Out (FIFO) rule. |
| Access to your cash value via policy loans | Whole life insurance policies offer the ability to take out loans against the policy while the policyholder is alive. These loans are not considered to be taxable events, even though the policy may have a large gain in excess of premiums paid. Plus, since the cash account is collateralized, the account continues to earn interest and dividends. |
| Protection in the event of disability | Whole life insurance policies can be continued even after the policyholder becomes disabled. By electing the Waiver of Premium rider, the policy will continue to provide death benefit protection and have cash value growth, even while the policyholder is not paying premiums. |
| Protection from Liability | In most states, your life insurance benefits are protected from creditors. |
Advantages and Disadvantages of Whole Life Insurance
All life insurance products generally contain advantages and disadvantages. This is not necessarily the result of the actual product but typically results from the needs of the buyer. For example, if you were looking for life insurance coverage for the rest of your life, term life insurance would have a considerable disadvantage:
Advantages of buying Whole Life Insurance from a mutual insurance company:
| Advantage | Description |
| Wealth accumulation | Your whole life policy’s cash value account will grow tax-deferred over time because of guaranteed interest earnings and non-guaranteed dividend payments. |
| Policy Loans that are tax-exempt | If you borrow against your cash value account, the proceeds are tax-exempt and not considered personal income. |
| Dividend Payments | All dividends are tax-exempt because they are considered a return of premium rather than income. |
| Guaranteed fixed premium payments | Once issued, your policy premiums are locked in and cannot be increased by the insurance company. |
| Life insurance coverage for a lifetime | The death benefit in your policy cannot be decreased if you become critically ill or are even admitted to a hospice facility. |
| Surrender Option | If you decide that you no longer need your policy, you can surrender it and receive your cash value or sell the policy to a third party for cash. |
Disadvantages of buying a whole life policy:
| The Complexity of Whole Life Insurance | Your whole life policy contains moving parts, and most policyholders will need help from an insurance professional to understand all of the benefits. |
| Earnings could be less than a traditional investment product | Although your participating whole life policy earns guaranteed interest and non-guaranteed dividends, it could still earn less money over time than a traditional investment product. |
| Higher premiums than other insurance products | Generally, whole life insurance premiums are considerably higher than term life insurance and universal life insurance. |
Who Should Consider Whole Life Insurance?
There is no one-size-fits-all answer to the question of whether whole life insurance is right for you. It depends on your financial objectives and personal circumstances. For example, if your primary goal is to purchase a death benefit to cover your family’s expenses in the event of your passing, term life insurance might be a better fit due to the higher cost of whole life insurance.
Whole life insurance can be a great option for those who want coverage security and the potential to use their policy for the infinite banking concept. For example, young parents who are high-income earners may find that the higher costs of premiums are worth it in the long run. In addition, they would have the opportunity to build up a sizable asset over time as the cash value of their policy grows.
We have been advising our clients on whole life insurance for decades and can help you better understand your whole life options. Use the whole life calculator on this page to get started with a quote. We are happy to discuss your quote and advise on your best path to success.
