Whole Life Insurance: Guaranteed Security

Whole life insurance is the most established type of permanent policy on the market, and its stability and "ease of use" keep it a popular option. Keep reading to find out how this policy works and whether it fits your needs as a policyholder.

This page:

  • Describes standard whole life insurance.

  • Explains a few pros and cons of whole life insurance.

  • Introduces common variations of whole life insurance policies.

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How whole life insurance works

A permanent life insurance policy is any plan that is guaranteed to pay out at some point, rather than expire. Whole life insurance is the most basic and consistent permanent life insurance policy you can buy.

Under a whole life policy, the premium and death benefit you are quoted at your policy's start remain the same throughout the policy's life. But because your insurer will be investing your premiums, the policy may also may accumulate a cash reserve. These funds can be put to use as premiums, reinvested, or saved - it's your choice.

Whole life insurance can be considerably more expensive than its limited cousin, term life insurance, but the death benefit is guaranteed as long as premiums are met.

The ins and outs of whole life insurance

First the disadvantages. The big problem with a whole life insurance policy is your lack of involvement in investing the cash value savings. Although the money can still be made available to you via loans, the investment portfolio itself is entirely decided upon by your insurance company.

And, as a rule, you can count on these investments to be very conservative. Which, in turn, means that they'll probably earn less than if you invested the money yourself.

The benefit of whole life insurance boils down to one thing - consistency. You pay the same premium from day one till you're 120. The cash value portion will always be intact and earning some amount of interest. And the death benefit will never decrease (provided that you don't borrow against it).

Variations on the whole life theme

Two common twists on a whole life policy are "limited payment" whole life insurance and "interest sensitive" whole life insurance.

Limited payment insurance is very similar to standard whole life insurance, only premium payments end when you turn 65. Coverage is still permanent. The total cost of coverage remains the same, but because payments are condensed into a shorter amount of time, the monthly premium will be higher.

Interest sensitive whole life insurance sets the death benefit and premiums permanently, but the cash value fluctuates in accordance with interest rates. The insurance company usually guarantees a minimum your cash value can be reduced to even if the interest rates would make your investments worth less, but make sure you verify this with your insurance company.

These policy variations are not available from all insurers.

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In order to purchase whole life insurance, you will almost certainly have to speak with a licensed pro, in order to iron-out details that are beyond the scope of this site. To get in touch with an agent in your area, get an online quote now.

Is whole life insurance right for you?

The policyholders who benefit most from purchasing a whole life insurance policy may be those who may have little interest or experience in investing, but who want to secure a permanent death benefit.

If you don't see or the need for a permanent policy or need to cut costs, a term life insurance policy might be a better choice. (Compare the two types here.) If, on the other hand, you want permanent protection but with more hands-on control over the cash involved, universal or variable life insurance might better fit the bill.

But most importantly . . .

You need to think carefully about choosing your level of coverage when it comes to whole life insurance. Too often consumers make the mistake of inadequately covering, or, even worse, financially overextending themselves. With a whole policy this would be a tragic error, because defaulting on premium payments can mean policy cancellation and the loss of your entire investment.

This is why it is crucial to assess your needs and confer with an insurance professional before you commit to a plan. When it comes to comparing whole versus term life insurance. Try InsureME. One basic online application can get you quotes (and solid advice!) from several insurance agents in your area.

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Up next: Universal life insurance.

Learn even more:

Getting the lowest possible premium on your life insurance is almost like an art form. There are many variables to consider, and to get the right balance of term length, benefit amounts, and policy riders and illustrations, you need to take a careful step-by-step approach to the buying process.

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