What is whole life insurance?

1 min readLast updated August 23, 2023by Rachel Carey

Whole life insurance lasts throughout your life, pays out a tax-free death benefit, and allows you to save over the years. Learn more about whole life insurance in our handy guide.

What are the key elements of whole life insurance? 

A whole life insurance policy is one type of permanent life insurance. Others include universal life, indexed universal life, and variable universal life. Whole life insurance is guaranteed to be there for you throughout your life, provided your premiums are paid, and it also guarantees a death benefit to your beneficiaries. As this type of cover is not time-limited, it does tend to be a little more expensive. Here are some key features and details: 

  • Whole life insurance is there for your entire life, however long that might be. 

  • Most policies have level premiums, so the amount you pay each month stays the same. 

  • Whole life policies have a cash savings feature called cash value, which you can draw on or borrow from. 

  • Your cash value element usually earns a fixed rate of interest. 

  • Any withdrawals or outstanding loans will reduce the death benefit. 

How does whole life insurance work? 

Whole life insurance guarantees a death benefit to your beneficiaries because you make regular premium payments throughout the policy. There is also a savings element, the cash value, where interest accumulates on a tax-deferred basis. Growing this cash value is a central component of whole life insurance. 

You can choose to increase the cash value by making payments that are larger than the agreed premium. This extra coverage is called paid-up additions or PUA. You can also opt to reinvest policy dividends into your cash value to earn more interest. Over time, the returns should grow larger than the premiums paid into the policy. 

Another feature of whole life insurance is enjoying a living benefit. You can access funds during your lifetime by requesting a withdrawal or loan. These are tax-free up to the value of the premiums you’ve paid. The interest on such loans is often lower than a typical personal or home equity loan. Still, you will be shrinking the cash value of your policy by doing this and also reducing the death benefit. 

Whole life insurance vs. term life insurance 

Whole life insurance is similar to term life insurance. Both provide a payout upon your death, but there are fundamental differences.  

The key difference is that whole life insurance offers a guaranteed death benefit for your entire lifetime, whereas a term life policy will only pay out within a strict timeframe of 10, 20, or 30 years. 

To provide whole life cover and benefits, whole life insurance is usually significantly more expensive – the monthly premium will be higher than with a term policy. These premiums are fixed, however, where term rates increase as you grow older. So, which is better? It depends on your priorities. 

What are the different types of whole life insurance? 

There are several types of whole life insurance, with the key difference being how premiums are paid. 

  • Level payment – the most common payment type, where premiums remain unchanged throughout your policy. 

  • Single premium – here, you pay a single large premium, which funds the policy throughout. This type of policy often involves paying taxes. 

  • Limited payment – you make a limited number of payments over a certain number of years, but the premiums will be higher than with level payments. 

  • Modified whole life insurance – you pay lower premiums here than with a standard policy over the first two or three years, then higher premiums in later years. Overall, this is a more expensive option. 

There are two further types of whole life insurance policies to consider: 

Participating policies redistribute any excess from premiums to you, the insured person, as a dividend. With this extra money, you can then make payments or increase policy coverage limits. These dividends are based on the company’s financial performance, so they are not guaranteed and will vary yearly. 

Non-participating policies use any payments that exceed the agreed monthly premium as profit for the insurance company.  

What are the pros and cons of whole life insurance? 

As with any financial product, there are advantages and disadvantages. Here are some of the main points to consider: 

The pros 

  • Lifetime coverage is permanent insurance, so you’re covered for your whole lifetime. 

  • Cash value – part of each premium payment can be used for loans, withdrawals, or larger premium payments. 

  • Guaranteed death benefit amount – this is set when you sign up for your policy and stays the same throughout. 

  • Predictable premium payments – these are fixed when you sign up too and will only alter if you go for a non-level premium policy. 

  • Tax-free loans – policy loans are not taxed, although if you withdraw more than you’ve contributed to the cash value, you will be taxed. 

The cons 

  • More expensive than term life – the policy accumulates cash value and covers you for your whole life; premiums are higher than term policies. 

  • Cash value may grow slowly – the growth rate is fixed for your cash value from the start, whereas some permanent cover – such as universal life – is based on interest rate changes and investment returns, so they can be higher. 

  • You can’t adjust your premium – with a whole life policy, your premium is fixed and can’t be adjusted. 

  • Death benefit is difficult to adjust –it is set at the start, so you can’t directly increase it. You can use dividends to buy additional coverage, though. 

How much does whole life insurance cost? 

As we’ve mentioned, whole life insurance does tend to cost more than other options. Data from Quotacy in the tables show the relatively low cost of term life insurance. 

Term life insurance costs 

$500,000 of coverageAverage monthly cost for a manAverage monthly cost for a woman
30 years old $30 $25
40 years old $52 $42
50 years old $138 $101
55 years old $241 $180

Whole life insurance costs

$500,000 of coverageAverage monthly cost for a manAverage monthly cost for a woman
30 years old $282 $247
40 years old $382 $352
50 years old $571 $498
60 years old $887 $782

The bottom line 

Whole life insurance offers a level premium, and guaranteed death benefit paid out upon your death, regardless of when this happens. This is clearly an advantage over term life insurance. Also, there’s that savings element, funded by part of your premium – the cash value – invested with a guaranteed return that you can then use, tax-free. The downside is significantly greater cost.  

So, would a policy like this fit your circumstances? That’s a personal decision and one we would urge you to make with expert professional support. You can find a financial advisor for managing your investment portfolio here

Senior Content Writer

Rachel Carey

Rachel is a Senior Content Writer at Unbiased. She has nearly a decade of experience writing and producing content across a range of different sectors.