Whole life insurance lasts forever and can help you build wealth, but it's expensive

  • Whole life insurance is a type of permanent life insurance that never expires, unlike term life insurance which ends after a specified period of time.
  • In addition to a death benefit, whole life insurance has cash value that accumulates interest on a tax-deferred basis — and you can use the cash value during your lifetime.
  • If you cancel your whole life insurance, you receive the cash value, but you'll pay taxes on it.
  • Premiums for whole life are expensive in the early years but decrease as you age.
  • Policygenius can help you compare life insurance policies to find the right coverage for you, at the right price »

Life insurance is a contract between you and the life insurance company where you pay premiums (monthly or annually) for a payout that your living relatives will receive, known as the death benefit. Should you die, the insurance company pays the death benefit to your chosen beneficiary.

Although whole life insurance is used synonymously with permanent life insurance, whole life is actually a type of permanent life insurance. There are two types of life insurance: permanent life and term life. 

Unlike term life insurance, which only lasts for a specific timeframe, permanent life insurance never expires. Also, permanent life insurance has a cash value component in addition to the death benefit. You can take a loan on the cash value or use it as collateral during your lifetime, with tax deferred. This is why permanent life insurance is considerably more expensive than term life insurance.

What is whole life insurance?

Whole life is a type of permanent life insurance. Permanent life insurance lasts until you die, or an average of 110 years, which is why it's more expensive in the early years of policy, but the older you get it becomes less expensive, according to Mark Williams, CEO of Brokers International.

Williams said that "in the early years of overpayment, the cash value put inside the policy earns interest and you use that bucket of money to offset the cost of insurance when you're older." 

You can also use the cash value of permanent life insurance during your lifetime, for things such as paying your children's college tuition, funding a business, or purchasing a second home. Most people use the cash value to fund their retirement — paying themselves a monthly income when they stop working. Due to these features, permanent life insurance can function as an investment and wealth-building tool.

There are different types of permanent life insurance, but they all have death benefits as well as a cash value that grows on a tax-deferred basis. The big difference between the types of permanent life insurance policies is how they manage the cash value.

Type of permanent life insuranceBest forWhere is money invested?
Whole lifeGuaranteeing exact same premium for the life of the policyIn your insurance company's portfolio
Universal lifeThe flexibility to change your premium, death benefit, and cash value over timeIn your insurance company's portfolio
Variable lifeInvesting your cash value in the stock market rather than your insurance companyStock market
Variable universal lifeThe flexibility to change your death benefit, investing in the stock market rather than your insurance companyStock market

Whole life stands out from other types of permanent life insurance because it guarantees the exact same payment for the life of the policy.

The insurance company invests your money (premium) with its own portfolio. The attraction is that your payment stays the same for the life of the policy. Many whole life insurance companies also let you increase the death benefit over time. 

You can add riders to your whole life insurance policy

All types of permanent life insurance, including whole life, offer riders that can be added to the policy. This can't be done with term life insurance policies.

Some riders include: waiver of premium if you are sick, hurt, or disabled; long-term care for assisted living, in-home or nursing facility; and a family rider which puts the entire family under one policy.

Every rider is an additional cost that increases the premium on your policy, but it's better than having multiple policies. Williams noted that riders vary depending on the insurance company, and that you must buy riders up front. 

How much does whole life insurance cost?

Permanent life insurance is considerably more expensive than term life insurance because of the cash value aspect of this kind of policy, and because the policy never expires. 

Here's how much a whole life insurance policy would cost per month at various ages, for both $25,000 in coverage and $50,000 in coverage.

 $25K whole life insurance monthly premium$50K whole life insurance monthly premium
30-year-old female$23$38
30-year-old male$27$47
35-year-old female$26$46
35-year-old male$31$55
40-year-old female$31$56
40-year-old male$38$68
45-year-old female$38$69
45-year-old male$47$83
50-year-old female$46$85
50-year-old male$59$106

Data from Insurance.com

Who needs whole life insurance?

High-wealth individuals typically have permanent life policies; the cost is considerably more than term life insurance. A whole life policy is the best option if you anticipate needing more insurance as you age, since you'll be able to add riders without needing multiple policies.

Also, you can increase your death benefit over time with a permanent policy. If you can't afford a permanent policy, get a term life policy that can be converted to a permanent policy.

Williams suggests a combination of permanent and term life insurance. For example, if you have $200,000 in permanent life and $300,000 in term for 20 years, at the end of 20 years the term life insurance policy goes away but you still have your $200,000 permanent policy that has earned cash value.

However, you should only purchase what you can afford. It's important to talk to a financial advisor about your financial situation and goals to determine what life insurance is best for you.

Ronda Lee is an associate editor for insurance at Personal Finance Insider covering life, auto, homeowners, and renters insurance for consumers. She is also a licensed attorney who practiced litigation and insurance defense.

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