Whole life insurance is a widely chosen form of permanent life insurance due to its straightforward structure and fixed premiums throughout the policy’s duration. It includes a cash value account, which operates as a tax-deferred savings vehicle and accrues interest at a rate determined by the insurer.
Ideal for: Individuals with substantial assets seeking to diversify their investment portfolio with a secure option, or those responsible for dependents who may require ongoing care.
How it operates: Whole life insurance guarantees a death benefit and builds cash value over time. A portion of each premium covers policy maintenance costs, while the remainder accumulates in the cash value account. As the cash value grows, policyholders can access funds through loans or withdrawals.
Types of Whole Life Insurance
There are different types of whole life insurance, categorized based on how premiums are paid.
Level Payment: Premiums stay the same throughout the life of the policy. This is the most common type of payment plan
Single Premium: A one-time large premium, which funds the policy for life. But this type of policy can be considered a modified endowment contract, which has tax consequences.
Limited payment: Pay a limited number of payments. Premiums will be higher than a level-payment agreement, but you’ll only pay them for a certain number of years.
Modified Whole Life Insurance: The opposite of a limited payment policy, this type of whole life insurance offers lower premiums than a standard policy in the first two or three years, and higher-than-standard premiums in the later years. It is more expensive in the long run.
Some of the Advantages:
Lifetime coverage
Cash value you can use for loans, withdrawals, or premium payments
Guaranteed death benefit amount
Predictable premium payments
Tax-free loans
Some Disadvantages:
More expensive than term life
Cash value may grow slower than with other policies
No flexibility to adjust the premium
Limited ability to adjust the death benefit