What is whole life insurance

If you’re looking for a complete explanation about what is whole life insurance, then you came to the right place.

We created this guide for you based on our five years of experience working with clients, whom we helped generate over $75 million with a financial system we call Lifestyle Banking.

This is not an article here you’ll learn only what a whole life insurance policy is. Here you will learn how to get the most of it.

What Is Whole Life Insurance?

Whole life insurance is a type of permanent life insurance — and according to the American Council of Life Insurers — the most common one.

Whole life insurance guarantees you a death benefit alongside a savings account, as long as the premium payments are being made regularly.

With many benefits to follow, it’s essential to understand the difference between whole life insurance and other types of permanent life insurance policy.

Types of permanent life insurance issued by the life insurance company

Choosing the best type of insurance is not an easy job, so here are the main things you should understand about the different types that exist.

What is whole life insurance vs. term insurance – This is probably the question you have in your mind right now, but you should know from the beginning that term insurance is not permanent insurance, as it provides coverage and right to death benefit for a limited period of time – better yet, term.

On the contrary, permanent life insurance guarantees you a death benefit for as long as you live. And these are the types that exist:

  1. Whole life insurance
  2. Universal life insurance
  3. Variable life insurance

They have one common thing – you are guaranteed for your life. Still, they differ from each other in the following: investment possibilities, flexibility in premiums, and access to your cash value.

Source: Insure.com

Understanding the Whole life insurance policy

What is whole life insurance is a question we often get, so we want to make sure we help you understand the topic thoroughly.

Whole Life Insurance Policy Terms You Should Know

Understanding whole life insurance might seem like a completely different language, so we prepared some basic terms you should understand.

Death Benefit – the amount of money to be paid by the insurance company after the death of the insured person.

Insuree – the person who owns the insurance policy and by paying insurance premiums builds the death benefit.

Insurer – the life insurance company that provides insurance products.

Policy Term – time period during the person is insured and is eligible for the death benefit.

Premium – financial obligations; the amount of money to be paid monthly or yearly (as per contract) by the policyholder.

The Cash Value of your policy – the amount of money that builds up over time and can be used by the insuree as a loan or investment source.

The Beneficiaries – the person, people or entity that receive the death benefit upon insuree’s wish. It’s usually — but it doesn’t have to be — your loved ones.

Whole Life Insurance Characteristics

Besides the basic terms and features, there are specific characteristics that differ whole life insurance from other life insurance policies.

Permanent Coverage

The name says it all – once you purchase the whole life insurance policy, you buy permanent insurance, which means that as long as you pay your premiums regularly, you are insured your entire life. This is important because this is one of the main differences and advantages of whole life insurance.

Fixed Premiums

Are you worried about the market and the price you would have to pay as you grow older? Whole life insurance works with fixed premiums — meaning that you would be contracted to pay the same amount of money monthly/yearly for as long as you live, no matter the state of the market or your age. In other words, your financial obligations will come at a guaranteed rate.

Guaranteed Death Benefit

Permanent coverage equals guaranteed death benefit no matter at what age you die. Once again, the only requirement to be met is for you to pay your premiums on a regular basis and your death benefit is guaranteed.

All these characteristics should bring you closer to understanding what is whole life insurance.

Whole Life Insurance Benefits

Financial protection for yourself or your loved ones is probably what you’re looking for in a life insurance policy. Still, every life insurance policy brings different sets of pros and cons. Based on your preferences, you should choose the policy that meets your needs best. In the case of whole life insurance, here are the benefits you might find rewarding.

Full whole life insurance policy control

You don’t lose money until you lose control of it — luckily, you won’t have to worry about this with a whole life insurance policy! With whole life insurance, you are signing a contract between yourself and the insurance company — which by fact is a private contract — giving you complete control over what happens to your money. You can access your account whenever you want to and without any penalty.

‘Forced savings’ – build up on your Cash Value

If you are not a person that easily saves money for retirement days, then whole life insurance might be just what you need to succeed in that. Every time you pay your premium, your cash value is being stored and you’re automatically saving some money for yourself. In other words, a whole life insurance policy builds cash value. The accumulated money can be later used based on your needs and we’ll explain in a bit how exactly.

Dividends – An Investment Tool

Although this is not guaranteed by your contract, it still has a great chance to be part of your deal. If you purchase whole life insurance — and the company you bought it from ends the year in profit — all the money from the profit goes back to the policyholders in the form of dividends. This is called A Return of Premium. And the even better news is that you are not taxed on these dividends – so only, by holding a whole life insurance policy, you are being paid a dividend.

Riders

There are different riders that can be attached to your whole life insurance and help improve the quality of your life. For example – if you are suffering from terminal or chronic disease, these specific riders can be attached to your insurance policy, resulting in utilized money that could be used for your medical treatment.

There is also a so-called Paid-Up Additional Rider that allows you to add additional cash value into your whole life insurance policy, which guarantees you will hold a cash value within the first year of being a policyholder – which is not the case with traditional whole life insurance.

‘A rainy day account’ – your go-to account for outstanding loans

We already mentioned that by paying your premiums, you are building up your cash value and saving some money for yourself. This comes in handy, especially in unexpected or situations of emergency. You will feel much safer when you know there is always stored cash value that you can withdraw the money from or get policy loans. If the situation calls for it, you can borrow against the accumulated funds.

Tax Benefits

One of the main benefits of holding a whole life insurance policy is that your cash value grows at a tax-free rate. This is important because taxes aren’t predictable and we can’t know how the system will work in years to follow. Once you purchase whole life insurance and add after-tax dollars, you can put your worries to bed. Also, after receiving the death benefit, your beneficiaries won’t have to pay the income tax.

What is the difference between term and whole life insurance?

And here comes the million-dollar question! What is whole life insurance vs term insurance? What are the main differences? How to know which one is right for me? Let’s tackle every question one by one. These are the differences you should be aware of.

Premiums

Off we start with characteristics that can be the same for whole life and term life insurance. One of them is the premium. Usually, term life insurance policies charge lower premiums.

The amount of money to be paid by the policy owner stays the same throughout the entire coverage period if it’s the whole life insurance or level premium/guaranteed term insurance. Bear in mind that some term insurance policies’ premiums can increase through time unless it’s precisely the level premium/guaranteed term insurance. Level premiums are to be paid monthly/quarterly/twice per year or yearly, depending on the contract with the insurance company.

Payouts

Payouts or death benefits are characteristic for both term life and whole life insurance. The vital difference here tho is that if you outlive the time period your term life insurance covers, your beneficiaries won’t receive the payout – the death benefit. On the other hand, with whole life insurance, your beneficiaries are guaranteed the payout no matter when you pass.

Cash Value

Here comes the first big difference – term life insurance builds no cash value. That means that all the benefits of whole life insurance building cash value would not be an option with term life insurance. However, if you choose whole life insurance, your cash value will be stored whenever you pay your premium, and it will grow through the years.

Price

With more benefits comes a higher price. You probably guessed it – term life insurance is way cheaper than whole life insurance. We could argue many reasons for this, but in the end, it comes to the feeling of safety and being guaranteed the payout with whole life insurance.

Another thing to consider here to get more precise information is your age, coverage amounts, and the insuring company – as all of them affect the price.

Ending a Policy

If you’re still uncertain whether you’re ready to commit to life insurance, you might want to know what the options are if you decide to back away – and they are different based on the type of policy. With term life insurance, ending a policy is an easy thing – you terminate your contract and stop paying the premiums. But also, as there is no cash value, there is nothing for you to take away after ending a policy.

On the contrary, with the whole life insurance, there is a cash value you build up and that you can take away once you end your policy. Bear in mind tho – different companies have different rules, so some might use your cash value to continue paying your premiums until there is no money left. And also, make sure to check the so-called Surrender rate – the rate you have to pay if you decide to end the contract and the policy itself.

How much does a life insurance company charge for a whole life insurance policy?

And now we come to the part of the process where decisions are usually being made. Whole life insurance probably sounds very appealing to you so far, but everything has its price, and you already know that whole life insurance policies are not the cheapest ones.

Cost of Whole Life Insurance

There are different factors that determine the cost of Whole Life Insurance. Here are the most common ones.

Age

This goes without saying – but the older you are, the higher is the chance for you to pass. Therefore the cost of insurance is higher.

Health

You can’t argue that the medical condition determines the cost of the policy. It is of such importance that besides being asked health questions, you might be obliged to do a medical exam before purchasing the policy. Factors that are reviewed go from basics – weight, height, smoking status, etc. to the more complicated ones – chronic or terminal illness. All this is counted in when coming up with an insurance price.

Gender

If you take a look at historical data, you will find out that women live longer. Thus in most insuring companies, women pay less for the same life insurance policy. Make sure to double-check this with the laws of the state you live in, as there might be some that forbid this kind of differentiation based on gender equality.

Family history

You are not alone in this world, and you’ll definitely feel connected to your roots and predecessors once the insurance company goes through your family history. The intentions here are clear – they are searching for family disease history and understanding how likely are you to inherit any disease from your predecessors.

Hobbies

Playing cards at the comfort of your home vs. going parachuting is quite different. Anyone can see those different hobbies bring a different level of risk of injury or — worst case scenario — death. That’s why if you’re an adrenalin lover, you will probably earn yourself a higher insurance policy price.

According to David P. Drea — a financial adviser with Morgan Stanley — you can estimate the average monthly cost of Whole Life Insurance in the following way: “The general rule of thumb is that you pay $100 per month for every $100,000 of coverage if you are a healthy individual up until around your 40s.”

If you would like to estimate the price of a whole life insurance policy, you can use a personal calculator. Please take this consciously into account as there are many factors that determine the final expenses.

Another essential thing to bear in mind is how often you are going to pay your premiums. As mentioned before, you can pay either monthly, quarterly, twice per year or yearly – depending on the contract with the insurance company. Although it seems easier to pay a smaller amount more frequently when you choose this option, you usually end up paying a bit more – this can add up over the years.

Cost Comparison of Life Insurance

The average cost of life insurance based on the policy type

This is calculated based on a $500,000 policy for super preferred applicants.

We already mentioned there are differences in the price in term and whole life insurance, and here you can see them clearly, as it is significant. You can also observe the difference between the genders due to the reasons already mentioned.

We also want to share an interesting case study done by Behr Insurance that shows us vividly the cost comparison.

In this case, a 50-years old woman could have chosen either to pay $672 annually for term life insurance or $3.283 annually for whole life insurance. At first glance, the term life insurance seems a better choice.

But 20 years later — when this woman is 70 years old — the net cost of her whole life insurance policy would be only $4.810 (total cost of $65.666 – cash value $610.856) compared to term life insurance policy cost of $13.440 without stored cash value.

The average cost of life insurance based on the age and health condition

There are a couple of more terms you could find useful to know before deciding whether to buy whole life insurance or not.

You already know the factors taken into account when calculating the policy price and now you will understand the basic categorization the insuring companies make based on your health conditions.

This is calculated based on a $250,000 whole life insurance policy paid till age 100, with monthly rates.

Standard policies are for people that used tobacco in the past year, have good health, cholesterol less than 300 and stable blood pressure.

Preferred policies are for people that meet all the previous criteria and can be proud of their above-average health condition without any serious medical issues.

Preferred plus (ultra) policies are for superheroes that meet all the expectations as the preferred ones and as well haven’t used tobacco in the past five years.

As mentioned before – the older you are, the higher the chance for you to pass. Thus – higher life insurance rates. You can see how the price grows with the age number.

Is Whole life insurance the right choice for you?

Purchasing life insurance is a serious commitment, so it’s completely understandable that you want to get as much information as you can to make the right choice.

Here are the questions that we suggest you ask yourself when deciding whether whole life insurance is the right choice for you.

  • For what number of years do you need life insurance? Is it more or less than 30 years?
  • Is there a reason for you to build cash value? What are the chances of you using it in the future?
  • Are there any flexibilities you are looking for – either in payment or payout?
  • What’s the most important thing you’re looking for in life insurance coverage?

After you answer these, you should be a step closer to understanding what the right choice for you is.

How to choose the right life insurance company?

If you decide to go for the whole life insurance, here are the most important things you should check before purchasing a policy.

The rating of the life insurance company

Choosing the right company is very important, so make sure to check the performance of the insurance company you are considering. It’s most likely that you’ll have a similar experience as all the customers before you.

The longevity of the life insurance company

We see all new companies rising every day, which is an excellent sign for our economy. But before signing the contract, you should probably check how long this company has been in business. The longer it has, the better the sign is.

Dividends payout history

This probably won’t be the reason you purchase a whole life insurance policy, but it definitely can be an excellent investment tool. So make sure you check if the company managed to payout the dividends throughout history.

The loan structure

It is important for you to know if you’re going to take a loan from the company, how would you be charged – with a fixed or variable rate.

The loan rate

The policy or loan fees are usually 4-5% – depending on the contract with the life insurance company. Please double-check this before signing the contract.

Term conversions

Purchasing anything for the entire lifetime brings vast responsibility. Therefore, it’s of enormous importance to check if the life insurance company would allow you to change the type of your insurance — and if so — how much would it cost you.

Portfolio of Whole life products

You know that there are different factors that determine the whole life insurance – such as age, term, etc.; it’s imperative to check how rich a portfolio of whole life products is, to understand what are the chances of you finding the right one in this same company. Don’t hesitate to ask your insurance agent to provide you with a detailed portfolio.

Conclusion

Whole life insurance is a broad topic that we tried to summarize as much as possible, but ensure you get all the information you need at the same time.

If you are still in doubt about what is whole life insurance, what is whole life insurance vs. term life insurance policy, and what is the right choice for you, we suggest that you start with understanding your needs for insurance first. Before finding the right choice, you need to know what right means to you.