Whole Life Insurance: What is it and How Does it Work?

Clifford PendellWritten by Clifford Pendell, Managing Partner and Co-founder

Whole life insurance is permanent life insurance coverage for your entire lifetime.

It differs from term life insurance, which typically expires within 10 to 30 years of purchase.

While permanent life insurance can be ideal for some situations, it’s not the best option for everyone.

In this insider’s guide to whole life insurance, our experts explain the most common forms of permanent life insurance coverage available and their benefits.

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What is Whole Life Insurance?

There are two types of life insurance—term and whole life. Term life insurance provides life insurance coverage for a set period, usually 10 to 30 years. In contrast, a whole life insurance policy is designed to be permanent and last your entire lifetime.

Because of its permanence, whole life is usually the best option for someone purchasing life insurance to leave an inheritance behind, cover funeral expenses and burial costs, establish or fund a trust. In these situations, you do not want to outlive your policy.

Whole life insurance comes in many shapes and sizes, but the best whole life insurance products are known as traditional whole life insurance. Two types of traditional whole life insurance policies are available—participating and non-participating.

Non-Participating Whole Life Insurance

Non-participating whole life insurance is the most common. It provides a guaranteed death benefit of up to $50,000 and fixed rates for the rest of your life. Non-participating whole life insurance policies do not offer investment opportunities or pay dividends, and they rarely accumulate a cash value from which to borrow.

These policies are ideal for price-conscious seniors who need minimal coverage for their end-of-life expenses and burial costs. Coverage is simple and easy to understand. If you make your payments on time, your policy will remain active until you pass away or reach age 100.

Some examples of popular non-participating whole life insurance companies include Globe Life, Mutual of Omaha, Foresters, and the Savings Bank Life Insurance Company. To instantly compare whole life insurance rates online, enter your information in the form below.

Participating Whole Life Insurance

Participating whole life insurance policies offer dividends, and can build a sizable cash value over time. However, the downside to participating whole life insurance is that most providers offer a minimum coverage of $50,000 to $100,000, so affordability could be an issue for older clients.

These policies are ideal for toddlers because when they reach adulthood, they’ll have some money set aside to help with college expenses, establishing housing, etc. In some situations, participating whole life is also ideal for older applicants. Some of the best whole life insurance companies include Penn Mutual, Mass Mutual, and Gerber Life.

To learn more about participating whole life insurance coverage and the benefits it can offer, give us a call today at 855-247-9555. You can also request a free whole life insurance quote below to view monthly quotes from dozens of top-rated whole life insurance providers.

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How Much Does Whole Life Insurance Cost?

Like other forms of life insurance, whole life insurance rates are primarily determined by the applicant’s age and gender. Non-participating whole life insurance policies do not have different health classes like term life insurance policies do. Instead, every person in the same age bracket pays the same rate.

To qualify for non-participating whole life insurance, you must be in fair to average health for your age group. Terminal illnesses and serious health conditions like a history of heart disease, cancer, or uncontrolled diabetes will prevent you from being eligible for these types of policies.

Participating whole life insurance products are not one-size-fits-all. They offer up to 16 health classes based on an applicant’s overall risk to the insurance provider. This allows them to charge more to applicants that present a higher risk, so they tend to be more lenient with health issues.

The downside is that applicants with serious health issues will have to pay substantially more for their participating whole life insurance policy. In these situations, it is best to consider a different type of permanent life insurance coverage.

Whole Life Insurance Quotes

The table below compares whole life insurance rates for applicants ages 50 to 75. The first column reflects the cost of a non-participating whole life insurance policy that does not build a cash value. The second column shows what applicants in comparable health would pay for a policy that builds cash value.

To obtain an accurate whole life insurance quote based on your age and health, please give us a call toll-free at 855-247-9555. You can also request a free quote below to instantly compare whole life insurance policies from dozens of top-rated life insurance providers.

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How Does Whole Life Insurance Build a Cash Value?

Building a cash value with whole life insurance is as easy as making your monthly payments on time. Participating whole life insurance plans will automatically take a portion of the premium to build your policy’s cash value every time you make a payment.

The insurance provider uses the remaining money to cover operating costs, generate profits, and fund your policy’s death benefit. Therefore, you do not need to pay extra into your policy each month to build a cash value. If you make your payments on time, your policy will continue growing.

However, like any other investment, it takes time for a whole life insurance policy to accumulate a sizable cash value. But, if you have extra money to invest, you’ll also have the option to overfund your policy to grow your cash value faster.

How Long Does It Take for Whole Life Insurance to Build Cash Value?

Insurance providers rely on conservative investment strategies, so you shouldn’t expect your cash value to grow overnight. According to Investopedia, with most participating whole life insurance policies, “Cash value doesn’t begin to accrue for two to five years.”

Below we’ve provided a whole life insurance illustration for a 49-year-old male client. He is in good health and purchased $50,000 of coverage. As you can see in the example, his cash value will only be $58 after the first year, but by the time he reaches 80, he can expect to have at least $31,837.

Whole Life Insurance Example Policy

ILLUSTRATION

To determine your options for a cash-accumulating whole life insurance policy, please call us at 855-247-9555. One of our experts will quickly compare your options and provide a custom illustration based on your coverage needs and budget.

Does Whole Life Insurance Always Pay Out?

If you pay your monthly premiums on time, your whole life insurance policy is guaranteed to pay out when you pass away. This money is typically paid as an untaxed lump sum to your beneficiary or beneficiaries within two weeks of your passing.

The only exception is if you outlive your policy’s maturity date. For example, some whole life insurance policies automatically endow when the insured reaches age 100. When this occurs, your policy is considered “paid up”, so your provider will pay the death benefit directly to you, not your beneficiary.

What Happens When a Whole Life Policy is Paid Up?

Most whole life insurance policies charge monthly premiums until the policyholder passes away or cancels their policy. However, if you live past the age of 100, your policy is paid up or endowed. Once this occurs, your life insurance provider will stop charging you monthly premiums.

At this time, your policy will automatically end, and your life insurance provider will issue you a tax-free check for your policy’s full death benefit. While most whole life insurance policies endow at age 100, this is not the case with all providers, so be sure to ask your agent or check the fine print of your policy.

If your policy does not endow at age 100, don’t worry. You will not lose your life insurance protection. Your coverage will remain active if you continue to pay the premiums. Most people don’t live past the age of 100, but if longevity runs in your family, consider a policy that endows at 100.

Can You Cash Out a Whole Life Policy?

Once your whole life insurance policy has accumulated a cash value, you can withdraw the money anytime. However, it’s important to note that most whole life insurance policies take at least 2 to 5 years to accumulate funds, and during this time, your policy’s cash value will be minimal.

Most whole life insurance policies take at least 20 years to accumulate a cash value comparable to your policy’s death benefit. Therefore, if you decide to borrow from your cash value, your whole life insurance policy’s death benefit will be reduced by the amount you borrow.

It’s also important to note that only participating whole life insurance policies pay dividends and can grow a significant cash value over time. Therefore, if accumulating a cash value is important, do not purchase a non-participating whole life insurance policy.

Benefits of Whole Life Insurance

Here are some of the benefits a whole life insurance policy can offer:

  • Lifetime coverage
  • Annual dividends
  • Cash value

A whole life insurance policy offers lifetime coverage and the opportunity to build a cash value with minimal effort. If you pay your premiums on time, your life insurance policy will remain active and accumulate a cash value.

Downsides of Whole Life Insurance

Some of the downsides of whole life insurance protection include:

  • Higher cost
  • Lower rate of return
  • Inflexibility

While whole life insurance cash value can be sizable, better investment opportunities are available. It’s also important to note that your life insurance benefits are tied to your investment value, so borrowing from your cash value will decrease your policy’s death benefit.

To learn more about the advantages and disadvantages of whole life insurance, please see our article: "Pros and Cons of Whole Life Insurance."

Is Whole Life Insurance Worth It?

Whole life insurance offers some great benefits, but it’s not the best option for everyone. For example, suppose you purchase life insurance to secure your mortgage balance, replace your income until retirement age, or collateralize a small business loan. In that case, term life insurance might be a better option.

While term life insurance policies do not build a cash value, pay dividends, or offer permanent protection, they offer the most coverage for the least amount of money. This makes them ideal for securing short-term financial goals or significant life events.

Whole life insurance is ideal for leaving an inheritance behind, protecting an estate from taxes, funding a trust, building a cash value, or paying for burial expenses and funeral costs. If you fall into one of these categories, paying a little extra for whole life insurance is your best bet.

We’re Here to Help

Our independent agency represents 63 top-rated life insurance providers, and we’re experts at matching our clients with the best whole life insurance policy available. So if you want to learn more about your options or obtain an accurate whole life insurance quote based on your needs, call us at 855-247-9555.

You can also click on the map below to instantly compare whole life insurance quotes online from dozens of leading providers. Our comparative shopping services are always free, and there is no cost to apply for life insurance. Get started today!

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Clifford Pendell

Clifford Pendell

Managing Partner and Co-founder

Cliff is a licensed life insurance agent and one of the owners of JRC Insurance Group. He has helped thousands of families of businesses with their life insurance needs since 2012 and specializes with applicants who are less than perfect health. In his spare time he enjoys spending time with family, traveling, and the great outdoors.

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