S age 40 is looking to buy a life insurance policy that will allow

Editorial Note: We earn a commission from partner links on Forbes Advisor. Commissions do not affect our editors' opinions or evaluations.Whole life insurance is one type of perman

S age 40 is looking to buy a life insurance policy that will allow

Editorial Note: We earn a commission from partner links on Forbes Advisor. Commissions do not affect our editors' opinions or evaluations.

Whole life insurance is one type of permanent life insurance that can provide lifelong coverage. It provides a variety of guarantees, which can be appealing to someone who doesnt want any guesswork after buying life insurance.

Whole life insurance combines an investment account called cash value and an insurance product. As long as you pay the premiums, your beneficiaries can claim the policys death benefit when you pass away.

What Is Whole Life Insurance?

Whole life insurance offers coverage for the rest of your life and includes a cash value component that lets you tap into it while youre alive.

Whole life insurance offers three kinds of guarantees:

  • A guaranteed minimum rate of return on the cash value
  • The promise that your premium payments wont go up
  • A guaranteed death benefit amount

Whole life insurance is more expensive than term life insurance because people with a whole life policy are guaranteed to have a death benefit when they die. Term life insurance, on the other hand, offers level rates for a specific period, such as 20 or 30 years. Term life policies are cheaper than whole life insurance because they offer only coverage, not cash value.

How Does Whole Life Insurance Work?

Whole life insurance works by first selecting the amount of coverage that best suits your needs. Once you have a policy, whole life insurance can remain in-force for your lifetimeas long as you continue to pay the premiums. Also, a cash value component will accrue over time.

Cash value accumulation in whole life insurance

Part of the premium payments for whole life insurance will accumulate in a cash value account, which grows over time and can be accessed with a policy loan, withdrawal or surrender of the policy.

Similar to a 401(k) or IRA, the money in the cash value account grows tax-free. However, if you take out cash value that includes investment gains, that portion will be taxable.

The accumulation of cash value is the major differentiator between whole life and term life insurance. While actual growth varies by policy, some take decades before the accumulated cash value exceeds the amount of premiums paid. This is because the entire premium does not go to the cash valueonly a small portion. The rest goes to paying for the insurance itself and expense charges.

Most whole life policies have a guaranteed return rate at a low percentage, but its impossible to know how much your cash value will actually grow. Thats because most insurance companies that sell whole life also offer a non-guaranteed return rate of return based on dividends. You can choose to apply your dividends to cash value every year, but you cant know how much that will amount to over time.

It may take decades for a policyholders cash value to exceed whats paid in premiums.

Using the cash value in whole life insurance

You can tap into cash value with a withdrawal or a loan, or also by surrendering the policy. If you take a loan, its tax-free, and you can pay it back, with interest. There are no taxes as long as your withdrawal is less than the portion of your cash value thats attributable to premiums youve paid. If your withdrawal is greater, youll owe taxes on the difference because those are investment gains.

Outstanding loans and withdrawals will both reduce the amount of death benefit paid out if you pass away. Thats not necessarily a bad thing. After all, one of the reasons to buy a whole life insurance policy is to get cash value, so why let the money sit there without ever using it?

You want to be sure that you know all the ramifications of accessing cash value prior to making any decisions.

Death benefit and picking beneficiaries

When you buy a policy, youll choose a life insurance beneficiary to receive the death benefit. You dont have to split the payout equally among beneficiaries. You can designate the percentage for each, such as 75% to Mary and 25% to John.

Its also a good idea to designate one or more contingent beneficiaries. These folks are like your backup plan in case all the primary beneficiaries are deceased when you pass away.

Designating beneficiaries is an important task, as is keeping your designation up to date with your wishes. The life insurance company is contractually obligated to pay the beneficiaries named on the policy, regardless of what your will says. Its wise to check once a year to verify your beneficiaries still reflect your wishes.

What happens when you die

A major selling point of whole life insurance is that it will be in force until your death, as long as youve paid the required premiums.

But heres a kicker: For most policies, the policy pays out only the death benefit, no matter how much cash value youve accumulated. At your death, the cash value reverts to the insurance company. And remember that outstanding loans and past withdrawals from cash value will reduce the payout to your beneficiaries.

Some policies allow you to purchase a rider that gives your beneficiaries both the death benefit and the accumulated cash value. This provision also means youll pay higher annual premiums, as the insurance company is on the hook for a larger payout.

How Much Does Whole Life Insurance Cost?

While some of the cash value features and the permanent nature of whole life insurance sound appealing, whole life insurance is simply unaffordable for many people.

Many life insurance shoppers look at term life vs. whole insurance costs. Its never an apples-to-apples comparison because the policies are so different. That said, here are examples of whole life insurance quotes based on a 30-year-old male of average height and weight for $500,000 in coverage.

This cost differential makes whole life insurance far less attractive to many individuals with an insurance need.

Here is a life insurance calculator to help you determine your life insurance need.

Factors that affect whole life insurance premiums

The coverage amount you choose will help determine your rate, along with:

  • Age and gender
  • Height and weight
  • Past and current health conditions
  • The health history of your parents and siblings
  • Nicotine and marijuana use, including nicotine patches and gum
  • Substance abuse
  • Credit
  • Criminal history
  • Driving record (especially DUI convictions and moving violations, such as speeding tickets)
  • Dangerous hobbies and activities (such as piloting planes or rock climbing)

With whole life insurance, there are a variety of other features and provisions that can affect costs as well, such as:

  • Payment period: You can choose to pay for the entire policy in a short time frame, such as 10 or 20 years. The premium would rise substantially given the front loading of payments.
  • Guaranteed return rate: Some companies offer a higher guaranteed return, which can result in higher annual premiums.
  • Dividend crediting: Many whole life policies pay out a dividend, and policyholders can choose how to receive it. Receiving your dividend payments as a credit toward premiums reduces your annual out-of-pocket cost.

Options for Surrendering Whole Life Insurance

With term life insurance, if you no longer have a need for insurance, you can simply stop paying. Once you stop, the policy lapses, and the insurance company will no longer pay any benefit if you pass away.

Whole life insurance isnt that simple. If you stop paying, the cash value will be used to pay any premiums until the cash value runs out and the policy lapses. But there are alternatives to simply stopping payments.

Options vary depending on your plan but can include the following tactics.

Take the cash surrender value

You can simply ask for the cash surrender value to be paid to you. This is the cash value minus any surrender charge. This action ends the insurance policy, so you should only do this if you no longer have a need for insurance, or have new insurance in place.

By taking the surrender value, youll have to pay income taxes on any investment gains that were part of the cash value.

Ask about reduced paid-up life insurance

If you want a paid-up policy with a smaller death benefit, the life insurance company takes what youve already paid in, calculates how large of a death benefit that would provide, and gives you a policy with the lower death benefit amount. This avoids any taxes and leaves you with some life insurance still in place.

Extended term life insurance

The life insurance company takes what youve already paid in and converts the policy into a term life policy for the same death benefit. How long the policy lasts depends on how much youve paid, how old you are and the companys current rates for a policy of that size and duration. This is helpful for someone who wants to preserve some life insurance for a short period of time, but no longer has a need for whole life insurance.

1035 exchange

You can exchange your policy for a different life insurance policy or for an annuity. This can make sense to avoid taxes on the surrender value or if you realize another whole life policy has substantially better features and youd prefer to have that policy instead.

When Does Whole Life Make Sense?

Given the expense of whole life insurance and that many people do not need insurance for their entire lives, it is often not the ideal product to purchase. However, there are some specific situations where buying some form of permanent life insurance makes sense. And you might find that a universal life insurance policy is more affordable if lifelong coverage is your main goal.

Funding a trust: Permanent life insurance can be used to fund a trust that will support children after you die.

Paying estate taxes: For those with estates larger than the current estate tax exemption, which is $12.06 million in 2022, permanent life insurance can make sense to help heirs pay estate taxes after you pass away. Some states have lower estate tax limits, so it may make sense for folks living in those states as well.

Funding a buy-sell agreement: If youre an owner of a business with a partner, you might consider whole life insurance to fund the purchase of each others shares in the business at death.

Top Sellers of Whole Life Insurance

Below are the biggest sellers of whole life insurance, in alphabetical order. The list is based on annualized premiums for 2020, according to LIMRA, a research group for the financial services industry.

  • CUNA Mutual
  • Gerber Life Insurance Co.
  • Guardian Life Insurance Co. of America
  • MassMutual Life Insurance Co.
  • Mutual of Omaha Cos.
  • New York Life
  • Northwestern Mutual
  • OneAmerica Financial
  • Penn Mutual
  • State Farm Life

Whole Life vs. Term Life vs. Universal Insurance

The key differences among whole life, term life and universal life insurance are the length of coverage, the ability to build cash value and the flexibility of premiums and death benefit.

What is the difference among term life, whole life and universal life insurance?

Term life insurance is good for people who want a financial safety net for a specific number of working years, such as the years of paying off a mortgage. You lock in level premiums for the term length, such as 10, 15, 20 or 30 years. A small number of companies even offer 35-year and 40-year term life insurance. Theres no cash value.

Whole life insurance is good for people who want lifelong coverage, premiums that dont change and a cash value component. Your beneficiary will get a life insurance payout no matter when you die, as long as youve paid the premiums needed to keep the policy in force. Some shoppers may still wonder whether they should get universal life insurance vs whole life insurance.

Universal life insurance is another type of permanent life insurance. It might be a good fit if you want the ability to tap into the policys cash value and the flexibility to adjust premium payments and death benefits as your needs change.

Related: Types of life insurance

Is Whole Life Insurance Worth It?

Here are questions and alternatives to help you decide if whole life insurance is right for you.

  • Do you need life insurance for more than 30 years?
  • Do you need cash value?
  • Do you want flexibility with payments or the payout amount?
  • Do you need a payout when you pass away, or only after both you and a spouse pass away?

Whole life insurance is a product that has some uses, but its not for everybody. The additional benefits offered by whole life can often be found by using your retirement and investment accounts for gains, in combination with a term life insurance policy.

Before purchasing any insurance policy, be sure to fully understand the options available, and the policies various provisions.

Whole Life Insurance Alternatives

Whole life insurance is only one type of permanent life insurance, so dont solely consider whole life insurance when determining if life insurance is worth it. Other types of permanent life insurance work quite differently from traditional whole life insurance. Other options include:

Life Insurance Market Share

Whole life makes up one-third of the individual life insurance market as measured by premiums paid, according to LIMRA, an industry-funded research group.

Compare Life Insurance Companies

Compare Policies With 8 Leading Insurers

Whole Life Insurance FAQ

How do I find cheap whole life insurance?

First, determine how much life insurance you need. For example, Forbes Advisors free life insurance calculator can help.

Once you have determined the life insurance amount you need, compare life insurance quotes from multiple companies. Life insurance quotes will vary widely among companies. Work with a financial advisor or experienced independent agent to identify the companies likely to offer you the best quotes.

What types of riders are available for whole life insurance policies?

Whole life insurance has riders that you can add to the policies, such as return of premium, waiver of premium, accidental death and long-term care. Some life insurance riders can help you benefit from a whole life policy while youre still alive, such as a critical illness rider, which lets you take money from your own death benefit if youre diagnosed with a critical illness.

Adding riders lets you customize a policy, but may also increase the cost.

Can a whole life insurance policy mature?

Yes, if a whole life policy reaches maturity, the policyholder receives the face amount of the policy or the amount of the death benefit and the policy ends.

A life insurance policy may reach maturity if the person reaches a certain age, such as 100 years old. The portion of the mature policy paid out is taxable, which is why insurance companies recommend extending policies past the maturity date if policyholders reach the specified age.

What is modified whole life insurance?

Most whole life insurance policies have level premiums, meaning the premium remains the same for the life of the policy. Modified whole life insurance policies have a premium amount that will increase one time. Your premiums will be lower for a set number of yearsoften the first three to fiveand then higher for the remainder of your lifetime. The death benefit will not change.

How much life insurance do I need?

To figure out how much life insurance you need, tally your current and future financial obligationssuch as a mortgageand subtract any current assets that could provide for your family.

Our life insurance calculator can make this task easier. Enter your annual income, the number of years youd want replacement income to last, your debt, any future college expenses, funeral needs, savings and life insurance policies you currently hold. The calculator will recommend a life insurance coverage amount.

Is a whole policy a good investment?

Whole life insurance provides steady, guaranteed, tax-free growth of cash value without market risk or volatility. While technically not an investment, whole life can be a low-risk option to help you achieve financial goals as the policy matures.

However, if you are looking only for a life insurance policy to offer a death benefit and nothing else, whole life is not the best choice. A term life insurance policy would be more affordable and could meet your needs.

Do I need life insurance if I am single with no dependents?

If you are single with no dependentsand no one is counting on your incomeyou probably dont need life insurance.

Keep in mind that life insurance rates rise with age and with declining health. A Forbes Advisor analysis of permanent life insurance rates determined that the average rate for a 30-year-old woman buying a whole life insurance policy with $250,000 in coverage is $184.95 per month. At age 50, this average rate increases to $403.09 a month.

So if you might want life insurance down the line, it will be cheaper to buy it now.

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