What is whole life insurance?

Whole life insurance is a type of life policy that covers you indefinitely, as long as you keep paying the premiums. Unlike term life insurance, which only lasts for a set period, whole life insurance never expires.

How it works is, you pay a set amount (premium) every month or year, which usually stays the same throughout your life. If you pass away, your family or other people you choose (beneficiaries) will receive a death benefit, which is a lump sum of money. It can help cover expenses like funeral costs, debts or provide financial support for your family.

A unique feature of whole life insurance is that it builds cash value over time. Part of your premium goes into a savings account. You can borrow against this cash value, use it to pay premiums or even withdraw it, but doing so may affect the death benefit – the money paid out to your beneficiaries when you die.

Whole life insurance can be a good option for those who want lifelong coverage and a policy that builds value over time, but it is usually more expensive than term life insurance.

Certain aspects of whole life insurance can make it an appealing choice, such as:

• Your premiums are fixed and will never go up, regardless of market conditions.
• You may be able to withdraw funds or take out a loan.
• Your death benefit is guaranteed as long as you make the required premium payments.

Whole life insurance provides fixed premiums and fixed death benefit

In most cases, the premium and death benefit stay constant for the duration of a whole life insurance policy, says the III. A universal life insurance policy, on the other hand, may offer the option to adjust your premiums or death benefit over time.

Because whole life insurance gives you fixed premiums and a fixed death benefit, you won't have to worry about increased premiums as you get older. And, your loved ones will also know how much to expect when your life insurance benefit is paid out after you pass away.

Whole life builds cash value

A whole life policy can serve as a source of emergency funds for you if something goes wrong, or you may be able to take out a loan against the policy. That's because a portion of each premium payment you make is funneled into a savings component of the policy called the cash value.

Over time, the cash value of your policy increases, and you may have the option to withdraw funds or borrow against it. The rules on how and when you can do this vary by company and policy. Your insurer may also offer guidelines to follow so that you don't inadvertently reduce the policy's death benefit or create a tax burden¹.

A whole life policy gives you lifetime coverage and comes with a cash value component. However, there are different types of whole life policies that primarily differ by how you pay for the policy.

Here are the different types of whole life insurance policies you may come across.

Level premium (or level payment) whole life insurance

With level premium whole life insurance, you pay the same payment over the duration of the entire policy. Some find this type of policy easier to budget for because the payments don’t change. It is also considered the most common form of whole life insurance.

Limited payment whole life insurance

This type of whole life insurance allows you to only pay premiums for a set amount of time, instead of your entire life (as you would with a level premium policy). The time period will be set by the specific policy – either a certain number of years, or until the policyholder reaches a certain age. Given that the premiums are paid for a limited period, the monthly payments are higher than a level premium policy.

Single premium whole life insurance

A single premium policy means you pay for your policy in one lump sum instead of in monthly installments. It can be difficult for most people to pay enough money up-front for sufficient coverage, according to Forbes. You may not be able to pay more money toward the policy after the initial payment, either. You can, however, use the cash value as you would with any other whole life policy.

Joint life insurance

Joint life insurance is often sold to couples who want to be covered individually under a single policy. There are typically two payout options: if one person passes, the other receives the death benefit, or the payout is given to a beneficiary after both policyholders pass.

Whole life insurance comes with fixed premiums and covers you for the duration of your life, whereas a term life policy only covers you for a set amount of time – typically between 10 and 30 years – after which point you’d have to renew or purchase a new policy.

Additionally, whole life has a cash value component, but term life insurance does not.

Below is a comparison of term and whole life insurance to give you a clearer idea of how they differ and what each type offers. You’ll notice that whole life tends to come with more features and term life tends to have lower premiums.

Both whole life and universal life insurance are types of permanent life insurance policies in that they cover you for your lifetime. The difference is universal life insurance allows you to increase your death benefit or lower your premiums once your policy accumulates enough cash value – while whole life comes with fixed premiums and benefits.

Here is a comparison of whole life insurance to universal life insurance and the unique benefits of both. While similar in some ways, universal life comes with greater flexibility in terms of premiums and death benefits.

The cost of a whole life insurance policy depends on several factors, including age, health and the amount of coverage you select.

For example, the younger you are when you buy whole life insurance, the lower your premiums will be. As you age, the cost goes up because the risk to the insurer that’s issuing the policy increases. Likewise, if you’re in good health, you’ll be considered lower risk and likely pay less. And the more coverage you choose, the more expensive your policy will be to account for the payout.

Not sure how much coverage you need? Check out our 'How much life insurance do I need?' article, which includes a calculator to give you a starting point.

Additionally, to get an idea of how much whole life insurance may cost you, start getting quotes from multiple insurers. Choose the same coverages for each quote for an accurate apples-to-apples comparison.

Note that when it comes to paying your premiums, you'll typically be able to make a fixed annual payment for a whole life insurance policy. Some life insurance companies may also offer the option to pay monthly, quarterly or twice a year. Be aware, however, that paying premiums more frequently than once per year may incur additional fees.

So, when might a whole life policy make sense for you? Life Happens says a whole life insurance policy might be a fit for someone who likes predictability over time. This is because whole life insurance offers death benefit guarantees and fixed premiums.

If you're considering a whole life insurance policy, it may be a good idea to talk it over with your insurer. They can help you review the different options before you make any decisions. That way, you can be confident you've chosen the life insurance policy that works best for you and your family.