- Whole life insurance is a policy that lasts as long as you pay the fixed premium.
- Part of your monthly payments go into a savings account, which you can borrow against.
- In the short-term, whole life insurance can be more expensive than term life policies.
- Whole life insurance isn't for everyone, but can be valuable in the long-run.
Inside this article
What is Whole Life Insurance?
Whole life insurance is a type of permanent life insurance—that means there is no limit to how long the policy lasts, and you pay monthly until you die, assuming you want to maintain said policy.
It's significantly more expensive than regular life insurance, but whole life insurance monthly payments never change and part of that premium goes into a savings account, building what's called cash value. You may be required to complete a medical exam to qualify for whole life insurance, which could actually increase your death benefit.[2,3]
How does whole life insurance work?
With whole life insurance, you're getting more than just life insurance.
Part of your monthly payment goes to guaranteeing a death benefit for your family, of course, but another part goes into a cash value account. You can take a loan out against that account and that's one of the big benefits of whole life insurance.
That cash value is tax-free, provided you follow the Internal Revenue Service's withdrawal rules. Some companies even pay dividends as part of the whole life insurance package.
Whole life insurance, however, is not for everyone.
“Usually if you’re paying the minimum premiums later in life, or further into the policy, as the insurance costs go up, the cash value can actually go down later in the policy,” says David Rae, a Certified Financial Planner (CFP) based in Los Angeles. It may become necessary to pay above the premium if you want to maintain or grow the balance.
Whole life insurance vs. term and universal life insurance
Let's break down the difference between whole life insurance and term and universal life insurance.
|Whole life||Universal life[2,7]||Term life[2,4,8]|
|Timeline||Until death||Until death||Limited to a specific period of time (usually one to 30 years)|
|Premium||Fixed (level)||Adjustable||Fixed (level)|
|Cash value component?||Yes||Yes||No|
Term vs. Whole Life Insurance
Term vs. Whole Life Insurance
Which type of life insurance is best for you? Find out what the differences are and how much each might cost before you decide.Find out more
How much does whole life insurance cost?
So, how much is whole life insurance going to cost you? To begin with, it's not cheap, and significantly more costly than term life insurance. For example, a $250,000 term life policy might cost a 50-year-old about $30 a month, while a $35,000 whole life policy could run $100 to $120 per month.
“In the short term, it’s going to always be more expensive,” explains Rae. “The longer the period of the insurance, the more risk that something would happen to you."
However, over the long term, it can actually end up being cheaper, Rae says. That’s because of the fixed price of the premium, compared to term policies that result in higher premiums every time the term expires.
So what goes into the determination of how much you pay for a whole life insurance policy? A multitude of factors, for example: insurance companies will consider your overall health and health history, as well as the amount of insurance you want. In general, the younger and healthier you are, the cheaper the cost of insurance, says Rae.
Your gender also has an impact. Women tend to pay less than men for whole life insurance. For example, a $100,000 whole life policy for a 50-year-old woman might cost $173 per month. That same policy could cost a man $217 per month. And the price goes up to $514 (women) and $611 (men) per month for those who wait until age 70.
Keep in mind that these are just sample costs, and yours will depend on your unique circumstances.
“The cheapest way to do it is buying when you’re younger and healthier. It can still make sense to wait, but you risk having health issues that will drive up premiums,” says Rae.
Who should get whole life insurance?
Here are a few questions you should ask yourself when deciding whether to get a whole life policy:
How much do you value the cash value component to justify the premium?
Will you be able to afford the premium in retirement?
Will your medical history or general health limit your options?
As a rule of thumb, you want to think about how much insurance you need and how much insurance you can afford, according to Rae. For example, parents may require more coverage to pay for things like college tuition or a mortgage than they can reasonably afford with a whole life policy. By contrast, a healthy, young single renter may find whole life insurance is a more affordable option.
Whole life insurance "can be great when used appropriately, but it’s probably oversold,” says Rae, explaining that it’s important to seek out a fiduciary financial advisor to ensure the product makes sense for your circumstances. “It’s not right for everyone.”