Whole life insurance provides a death benefit no matter how old you are, as long as you continue to pay the policy’s premiums. For this reason, it’s considered a type of permanent life insurance.
In addition to providing a death benefit, a whole life insurance policy also accumulates cash value that is guaranteed to grow by a certain amount each year. As a result, whole life premiums are significantly higher than term life premiums for the same death benefit. Part of your premiums for the first few years of the policy will go toward administrative fees and the agent’s commission. The premiums are the same each year, and you can choose to pay premiums every year for as long as the policy is in effect or for a set number of years. Spreading your total premiums out over just 10, 15 or 20 years instead of over a lifetime will result in a higher annual premium during those years, but may be an appealing feature for someone who wants to eliminate the ongoing expense of life insurance premiums before retirement. A variation called single-premium whole life insurance lets you pay the entire premium up front in a lump sum.
You can borrow against the policy’s cash value for any reason, such as paying for your children’s college tuition or covering an emergency expense. Whatever part of the loan you haven’t repaid at your death gets subtracted from the policy’s death benefit. But any accumulated cash value that exists at your death does not get added to the policy’s death benefit; it goes back to the insurance company.
The other reason whole life insurance costs more than term life insurance is that whole life insurance policies often pay annual dividends. These dividends can be used to help pay premiums or to purchase more insurance, or the insurance company can simply send you a check for the dividend amount.
Because whole life is difficult to understand and expensive for the amount of coverage it provides, it is not the best option for most people. That’s why you’ll often hear the phrase, “Buy term and invest the difference.” Investing the money you save by purchasing term instead of whole life insurance rather than putting it into a cash value and paying an agent’s commissions will be a better use of that money for most people. That being said, whole life is simpler than universal or variable life insurance.
If you would like to discuss your life insurance needs directly, feel free to contact us by phone or email. We'll be happy to assist you with any questions concerning how you can be better prepared and protected.