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Whole life insurance: What you need to know

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Life insurance is a good option if you're looking to help guarantee your family's financial future. A life insurance policy will award your loved ones with a payout if you die during the time of coverage.

There are two main types of life insurance: term and permanent life insurance. Term life insurance is only in effect for a certain period, such as 10, 15 or 20 years. Term life is meant for your primary income-making years.

If you want to make sure your loved ones get money when you die, permanent life insurance, including whole life, may be a better solution. Whole life doesn't have an expiration date.

As with all financial products, there are pros and cons to permanent insurance. Take a deep dive into whole life insurance to decide if it's the right option for you.

What is whole life insurance?

Whole life insurance is one of the four main types of permanent life insurance

Instead of buying a policy for say 10 years as you would with term life, you purchase life insurance for life. Your policy and premiums remain the same as long as you continue to pay them.

The no-expiration-date factor is an attractive selling point. But there's more. Whole life policies have two parts:

  • A death benefit guarantees that there’s money for your beneficiaries.
  • The policy’s cash value grows in time and you can access while you're alive.

Whole life insurance is like getting life insurance and retirement planning that all rolled into one.

How is whole life insurance different from term life?

Term life insurance and permanent life insurance products, such as whole life, have significant differences.

Carrie Skogsberg of COUNTRY Financial, a life insurance company, puts it this way: "Term life insurance is compared to renting and a whole life policy is compared to owning.

When you buy term life insurance, you typically lose the premiums you paid over the policy’s length if you outlive your policy. Much like renting a car, you paid for the privilege of driving it for a set period. You don't own the vehicle or have any further benefits when you return the keys.

As for whole life insurance, as long as you pay your premiums, your loved ones get a death benefit. Plus, you have access to the policy’s growing cash value.

Weigh the differences between term and whole life insurance to get a better grasp of how it works:

Whole life insurance is more expensive than term life

When you have a whole life policy, you're paying for two parts: the death benefit you're leaving and the cash value. Expect to pay more.

Whole life insurance doesn't expire like term life

A term life insurance policy has an expiration date. When you buy term life, you'll need to decide on the policy’s length.

Typical term life insurance lengths include 10, 20 or 30 years.

Your loved ones don’t receive a death benefit if you die after the term expires. In contrast, whole life insurance is good for as long as you pay your premiums. This is good news as you age when it's much harder to get life insurance. Your loved ones are guaranteed a payout.

Whole life insurance policies increase in value

Part of whole life premiums goes toward building cash value. Whole life policies earn a fixed interest rate and grow on a tax-deferred basis.

You can tap into the value by making withdrawals, borrowing against the value or even asking your insurer to increase the death benefit payout with the funds from your cash value account.

Whole life insurance builds cash value

Whole life insurance has both a face value and a cash value. The policy's face value is what your beneficiaries receive when you die. So if you have a $500,000 policy, they'll receive $500,000 at your death.

The cash value is the amount that accumulates in a tax-deferred account. You'll receive interest on the amount, growing the funds further. And if you go with a mutual life insurance company, you may also receive dividends. That's because having a policy with a mutual life insurance company means you own a part of the company and can share in the mutual's profits in the form of an annual dividend payout.

Five ways to use cash value

The cash value doesn't go to your loved ones when you die -- it goes to the insurance company.

You're probably thinking the best idea is to withdraw the cash value before it adds up. But doing so could reduce the death benefit amount.

There are some strategies for taking advantage of the cash value without affecting your loved ones' payout. You may want to consult with a financial planner or tax consultant to weigh the tax implications. Here are five things you can do with the cash value:

  • Borrow against it. If you're cash-strapped, loan yourself the amount from your cash value account. You won't have to face a credit check or worry about using other assets as collateral. But if you've taken out a loan and it hasn't been paid back by the time you die, your beneficiaries will be paid a lower death benefit by your insurance company.
  • Surrender the whole life insurance policy for its cash value. You can cash out to use the funds for an emergency. But you'll be giving up the death benefit portion of the whole life policy.
  • Add an accelerated death benefit rider. In most cases, the rider is free or low cost. If you become terminally or chronically ill, you can use the cash value funds to pay for your medical and living expenses. But as with all other options, the death benefit will be reduced by how much you withdraw.
  • Use it to cover your premiums. If you have a sizable balance, you can stop paying your premiums and have them deducted from your cash value instead. Let your insurer know you're "paid up" and ask them to deduct the annual premiums from your cash value account.
  • Ask your insurer to transfer the cash value to the death benefit. An insurer isn't obligated to do it, but they would agree to keep your business in most cases. Ask them to increase your policy's death benefit from the current amount of your cash value account. You'll transfer the cash value, which would go to the insurer when you die, to your loved ones.

Does whole life require a medical exam?

A whole life insurance policy typically requires a medical exam. The exam starts by looking at your height, weight and medical history. It may also include blood and urine tests for specific medical problems or to make sure you didn't omit things about your health, such as smoking.

Depending on your medical exam’s results and your health, an insurer may reject your life insurance application or you may have to pay a higher premium.

Some typical health issues that could flag your application include:

  • Diabetes
  • Heart disease
  • HIV
  • Smoking

If you have a medical condition that prevents you from finding whole life insurance, you might look into guaranteed issue term life insurance, also known as "quick issue.” You pay a higher premium because there’s no medical exam or questions asked. Also, there may be a waiting period before the policy will pay out. Simplified issue is another option. Those policies don’t require an exam, but you do have to answer health-related questions.

The COVID-19 pandemic has also created a unique situation in which some of the best life insurance companies don’t require medical exams. You may qualify for a whole life policy without a medical exam, or by simply answering some questions about your medical history.

How much does whole life insurance cost?

The cost of whole life insurance is tricky. Many variables affect premiums, including age, health and death benefit amount. 

David P. Drea, a financial adviser with Morgan Stanley, says, "The general rule of thumb is that you pay $100 per month for every $100,000 of coverage if you are a healthy individual up until around your 40s."

Here are quotes from New York Life for a whole life policy. The policy is for a person in Alabama and it’s in the company’s best underwriting risk class with the lowest available premium for the age and gender provided. The premium includes the disability waiver of premium rider, allowing members to miss payments if they become disabled.

Death benefitProfileAnnual disability waiver of premium rider costAnnual whole life insurance costTotal monthly premiumTotal annual premium
$250,00035-year-old male$99.97$3,095.00$266.25$3,194.97
$250,00050-year-old male$361.91$6,665.00$585.58$7,026.91
$500,00035-year-old male$196.71$6,090.00$523.89$6,286.71
$500,00050-year-old male$718.39$13,230.00$1,162.37$13,948.39
$1,000,00035-year-old male$390.18$12,080.00$1,039.18$12,470.18
$1,000,00050-year-old male$1,431.35$26,360.00$2,315.95$27,791.35

Source: New York Life

As you can see in the age comparison, you pay less if you get a policy when you’re younger. Don't wait until you're older to plan for your family's legacy.

Term or whole life insurance?

Despite access to cash, many experts argue that purchasing whole life insurance isn't worth the cost. They point to the higher premiums compared to term life insurance.

Instead, they suggest a term policy with its lower premiums and find a safe way to invest the extra cash.

However, here's when a whole life policy might be better for you:

  • You want to make sure your loved ones are covered.
  • You want to add riders to your policy.
  • You want to tap into your policy's cash value while you're alive.

If you're still unsure, remember that many term life insurance policies offer aconversion feature. This option will allow you to change the term life policy to a permanent life policy, either during a set period or at any point in the term. Some policies even allow you to credit some of the term premiums you've already paid toward your permanent life insurance policy.

Whether whole life insurance is right for you depends on why you need life insurance. Make sure to weigh the pros and cons of each type of insurance before making the decision.