Whole Life Insurance: The Definitive Guide

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What is whole life insurance? And who would actually benefit from owning this product? Learn everything you need to know about whole life insurance right here.

In this article

Key Points

  • Whole life insurance is permanent – which means it lasts for your life (assuming you pay your premiums on time)
  • Whole life insurance maintains a forced savings component (a cash value) that builds up slowly and overtime
  • The cash value component can be accessed during your lifetime
  • The death benefit of your whole life insurance policy will be paid to your designated beneficiaries upon your passing

Whole Life Insurance: The Definitive Guide


Although it likely seems like we still have many decades to live, no one (to my knowledge) is immortal. 

Talking about death with loved ones is certainly not a mood booster, but it’s something we should do if we have a family and believe that it is our duty to take financial care of them. 

That’s the purpose of life insurance in general – making sure your family is financially taken care of once you kick the bucket (for lack of better words).

That means, you probably won’t see any of your insurance investment – but your family certainly will. 

Because there are so many types of insurance products out there, and whole life insurance being one of the most popular life insurance products, let’s figure out what’s beneath the hood and if this life insurance product is the right fit for you and your personal situation.

You may have heard of the term “permanent life insurance.” 

Whole life insurance is the epitome of that definition because whole life insurance policies make up the majority of the life insurance market. 

The tides, however, are slowly shifting toward term life insurance – but that’s another story.

the millennial money woman blog post "whole life insurance review"

In-Depth Review of Whole Life Insurance


Believe it or not, 
whole life insurance policies were actually the most popular type of insurance product in the mid-1900’s. 

However, the tables have certainly turned in the modern-day, as other insurance products have become more popular – especially for Millennials who typically cannot afford pricey whole life insurance premiums.

Whole life insurance policies are a very different animal.

First, whole life insurance policies are guaranteed for the policy holder’s lifetime. 

That means the death benefit is guaranteed for the policy holder’s life. 

Second, whole life insurance policies build a cash value component for their policyholder to access down the road. 

You can access the cash value bucket either by withdrawing money or by taking a loan from the cash value and then paying back that loan with interest. 

Third, whole life insurance policies are very, very expensive (at least for your average Millennial). 

Two of the reasons why these policies are so expensive is because of the lifetime guarantee and the cash value component. 

Now, let’s take a look at the cash value component. 

the millennial money woman blog post "what can i do with the whole life insurance cash value"

What can I do With the Whole Life Insurance Cash Value?


One of the main reasons why whole life insurance premiums are so expensive is because of the 
cash value that builds up within the policy over time.

As a reminder, to really see a dent in your whole life insurance cash value, it typically takes about 10 years. 

The cash value builds up in your whole life policies based on the premiums that you pay. 

A small percentage of your annual premiums will be funneled into the cash value bucket. 

This bucket will grow at a guaranteed interest rate (which we will discuss below) and this bucket can be accessed. 

Here are some cash value bucket facts:

  • The cash value grows tax-free
  • Cash value growth depends on the guaranteed rate of return of your whole life policy
  • Typical guaranteed cash value interest rates vary between 1% to 2%

Let’s say you’re beginning to see a sizable cash value build-up within your policy after about 15 years. 

What do you do with that cash?

You can use the cash value in several different ways during your lifetime. 

Below, I’ve described 2 ways you can use your cash value:

  • You can take a loan, and pay it back with interest
  • You can take a withdrawal 
the millennial money woman blog post "whole life insurance costs"

Whole Life Insurance Costs


I’m going to be very honest with you: If you are a Millennial and building your career, then whole life insurance will likely be unaffordable for you.

And you know what – that’s OK. 

Even for those of us who can afford whole life insurance premiums, in my opinion, the cost relative to the benefit simply is not worth it. 

Although you really can’t compare term life to whole life insurance costs, there is one large takeaway: Term life insurance premiums, relative to the death benefit are far, far lower than the cost of a whole life insurance policy premium for the same death benefit. 

Let’s take my friend Mia, for instance. If she were to consider purchasing whole life insurance versus term life insurance, the cost of her premiums relative to her death benefit would vary quite significantly.

mias statistics

Now let’s see how much death benefit Mia could purchase with a term life insurance policy versus a whole life insurance policy.

the millennial money woman blog post "term life insurance vs whole life insurance"

The main reason why there is such a large difference in premium cost is because whole life is guaranteed for life and it builds a cash value. 

Typically, it will take 10 years for the cash value to build up substantially within the whole life insurance policy. 

So time is of the essence.

Variables in Whole Life Insurance Pricing


As I am sure you can imagine, to determine how much you actually pay for your whole life insurance policy depends on several factors. 

You could have a twin sister or brother – but your whole life insurance premiums could be entirely different because you may be a non-smoker while your sibling is a smoker. 

You may be extremely healthy while your sibling is not. 

Take a look at the illustration below to see how some personal factors could determine the cost of your whole life insurance premium costs.

Factor Increase Premium Decrease Premium
Age
Older
Younger
Gender
Male
Female
Height & Weight
Tall & Overweight or Underweight
Short & Average
Past & Current Health Conditions
Any Health Condition
No Health Condition
Health History of Family Members
Poor Health History
Good Health History
Smoker Status
Smoker
Non-Smoker
Substance Use History
Substance Abuse
No Substance Use
Criminal History
Criminal Past
No Criminal Past
Hobbies
Hazardous Hobbies
Non-Hazardous Hobbies

As you can see, while you complete your whole life insurance application form, you will have a fairly lengthy questionnaire to complete.

As you can imagine, there are not just personal factors that go into the formula for determining your whole life insurance premium. 

In fact, there are also your standard factors that go into determining the cost of your whole life insurance policy, as described below:

Factor Increase Premium Decrease Premium
Pay Period
Shorter Pay Period
Longer Pay Period
Guaranteed Interest Rate
Higher Guarantee
Lower Guarantee
Dividend Crediting
No Dividend Crediting
Dividend Crediting
Death Benefit
Higher Death Benefit
Lower Death Benefit

Let’s explore what these four additional points actually mean.

Pay Period

First, let’s talk about pay period. 

If you purchase a whole life insurance policy, you will receive a quote from your insurance agent, letting you know how much each year you are expected to pay to keep that whole life insurance policy “in-force” (or intact). 

If you miss a payment, you may be at risk of losing the whole life insurance policy. 

Now, let’s say you just came into a sizable inheritance and decided to take a chunk of that inheritance money and pay it toward your whole life insurance policy. 

Although the whole life insurance policy is guaranteed for your life – which means you have to pay every year of your life – you can shorten the amount of time you pay and with that the premium cost. 

If you want to pay your whole life insurance policy only for 10 or 20 years (versus 40 or 50 years), your premiums will automatically increase. 

If you decide to pay your premiums over 50 years, your premiums will decrease.

the millennial money woman blog post "whole life insurance payment schedule"

As you can see, your annual premium will decrease per year if you decide to pay your whole life policy over a longer period of time. 

In the illustration above, you will see that line 1, where premiums are paid in only for 10 years, you spend $20,000 each year (and $200,000 in total). 

Line 2, on the other hand, you pay premiums over 50 years, $4,000 each year, and still spend $200,000.

The question begs: Why would you want to spend $200,000 in the first 10 years of your policy and not stretch out your premiums over your life?

Let’s say you’ve had your whole life policy for 3 years and you pass away. 

Let’s also say you elected to use the payment method as illustrated by line 2. 

You “only” paid in $12,000 ($4,000 in premiums per year X 3 years) versus paying in $60,000 as you would have with line 1 ($20,000 per year X 3 years). 

I would elect to go with line 2.

Guaranteed Interest Rate

This point goes hand-in-hand with the cash value of the whole life insurance policy. 

One of the attractive features of whole life insurance policies is the cash value that gradually builds up within a whole life insurance policy. 

The cash value within a whole life insurance policy is guaranteed, to some degree. 

That means that the whole life insurance company guarantees a specific interest rate that your cash value will be credited (or given) each year. 

In other words, with a whole life insurance policy, your cash value (which builds up very, very slowly over time) will be (for example) guaranteed a 3% rate of return. 

In the stock market, over the past 50 years, investments have seen a 7% return. 

However – that 7% is NOT a guarantee yet a lot more attractive than the 3% guaranteed return with a whole life insurance policy.  

If you decide that you would like to have a 7% guaranteed rate of return on your cash value in your whole life insurance policy, then your premiums will increase quite drastically compared to if you just wanted to see a guaranteed 2% rate of return.

Dividend Crediting


Why do whole life insurance policies receive a dividend payout? And what does this mean?

In essence, whole life insurance companies want to thank their customers for paying such a hefty annual premium (compared to other life insurance products such as term life) by paying you through what is known as a dividend credit.

A dividend credit is essentially a small percentage of the whole life insurance company’s profits, which is then paid to the policyholder. 

Not every whole life insurance company does this.

Some whole life insurance companies that do participate in dividend crediting include:

the millennial money woman blog post "dividend crediting whole life insurance companies"

Dividend Crediting Whole Life Insurance Companies:

  • Guardian
  • Mass Mutual
  • Minnesota Life
  • New York Life
  • Ohio National 
  • Northwestern Mutual 

Let’s say you elect to go with a whole life insurance company that participates in dividend crediting. 

If you receive a dividend back – which can range from a few hundred dollars to a few thousand dollars (the dividend you receive back really depends on the amount of money you have paid into the policy) you have several options, three of which are likely the most popular:

  • Take the dividends in the form of a check
  • Use the dividends to pay toward your premiums
  • Use the dividends to buy additional life insurance (increase the existing death benefit)

Of course, if you use the dividend payouts toward your premiums, then your annual premiums will be lower. 

Moreover, some whole life insurance policies offer guaranteed dividends while other whole insurance policies offer non-guaranteed dividends. 

If you decide to purchase a guaranteed dividend crediting policy, your premiums will be higher. 

A non-guaranteed dividend crediting policy will have lower premiums. 

Death Benefit


The death benefit is really what it all comes down to: How much money will your designated beneficiaries receive once you pass away.

The more death benefit you purchase, the higher your annual insurance premiums. 

The lower your death benefit, the lower your annual whole life insurance premium.

what happens when i surrender my whole life insurance policy

What Happens When I Surrender my Whole Life Insurance Policy?
 

Let’s say you’re sick and tired of having a whole life insurance policy. 

You hate paying $4,000 per year for $200,000 of death benefit and you simply can’t afford it anymore. 

To top it all off, you already built up a small cash value in the policy – of about $2,000. Now what?

Well, it sounds like you are raising the white flag, right?

That’s called surrendering your whole life insurance. 

So yes, there is a back door out of the whole life insurance policy contract. 

However, an insurance surrender is a last resort option. 

A surrender is a last resort option (as with any war story), because you may lose quite a bit of that $2,000 (as with the previous example) cash value that has built up within your whole life insurance policy. 

In fact, most whole life insurance policies “lock up” your cash value for a minimum of 7 years (I’ve seen lock up periods last up to 15 years too). 

That means if you surrender your whole life insurance policy and have $2,000 of cash value built up – which is rightfully yours – you may not see any of that cash value because you are surrendering within that 7 or 15-year time frame.

There is something called a surrender schedule

A surrender schedule typically illustrates if you were to surrender your insurance policy, how much of your money will be lost per year, on a downward sliding scale. 

Surrender schedules typically look like the below illustration:

7-Year Surrender Period % of Money That Life Insurance Company Keeps
Year 1
10%
Year 2
8.75%
Year 3
7.5%
Year 4
6.25%
Year 5
5%
Year 6
2.5%
Year 7
0%

As you can see, you have to make sure you stick with your commitment. 

If you decide to surrender your whole life insurance policy in the first 2 or 3 years, you might as well have lit your money on fire – because chances are you won’t see anything back.

On a lighter note – if you have waited a few years, your situation changed and you no longer need whole life insurance, it may be time to surrender. 

Below are a few ways you could surrender your whole life insurance:

  • Cash surrender value
  • Reduced paid-up life insurance 
  • Extended-term life insurance
  • 1035 Exchange

1. Cash Surrender Value


Here, you simply call your whole life insurance provider, ask them to fill out the necessary paperwork to surrender your policy, and ask them to write a check for whatever they owe you, based off of your cash value. 

The cash surrender value is equal to the cash value that has built up in your policy (so in this case $2,000) minus the surrender charge. 

If you are currently in year 4 of your whole life insurance policy contract, you would receive a check of $1,875. 

If this number is simply a return of what you already paid into the policy, you won’t have to pay taxes on the check. 

If there are gains in your cash value, however, you will have to pay income taxes on that portion. It’s best to consult with a CPA at that point.

2. Reduced Paid-Up Life Insurance


This is an option for those who do want to keep a small death benefit and keep their life insurance going without making any more payments. 

That’s the point when the life insurance company analyzes how much you have already paid into the policy and from that pay-in amount determines how big of a death benefit you could receive permanently. 

Chances are, your death benefit amount will be reduced quite drastically to equal what you have already paid into the policy. 

You won’t have to pay any taxes and your beneficiaries will still receive a small death benefit.

3. Extended Term Life Insurance


This surrender option is similar to the reduced paid-up life insurance option, with one small twist: the life insurance company analyzes what you have already paid into your whole life insurance policy and then converts the whole life policy to a term life policy for the same death benefit. 

Instead of having a guaranteed for life death benefit (as with whole life insurance) you now only have a certain term for that same guaranteed death benefit. 

The length of the term depends on how much money you have already paid into the whole life insurance policy, how old you are, the life insurance company’s rates for term life insurance with that death benefit, etc. 

This option is optimal for those who are sick of paying high whole life insurance premiums, and want to maintain the same death benefit but only for a set term. 

4. 1035 Exchange


A 1035 Exchange is a fancy tax term that essentially means you can avoid taxes while swapping your whole life policy for another life insurance policy – or an annuity (not recommended). 

Quite frankly, a 1035 exchange is another animal and really doesn’t apply to people who have not had a large cash value build-up within their whole life policy.

When Does it Make Sense to Buy Whole Life Insurance? 


Typically, it makes sense to purchase whole life insurance only in certain circumstances – this type of life insurance product is not everyone’s cup of tea. 

I have seen several points where it could make sense to purchase whole life insurance:

the millennial money woman blog post "when does it make sense to buy whole life insurance"
  • You need or want coverage that lasts for your life
  • You want level premium payments (in other words, the cost of the policy will be the same for the rest of your life)
  • You need help saving money – in the form of the cash value component of life insurance

Moreover, I would say that whole life insurance is ideal for people in these types of situations:

the millennial money woman blog post "whole life insurance is ideal for"
  • People who love guarantees
  • People who have the cash flow to afford more expensive premiums 
  • People who don’t want to pay premiums out-of-pocket in a few decades because they have dividends and cash value to pay for those premiums
  • People who want to fund a trust
  • People who want their beneficiaries to have help in paying estate taxes
  • People who run a business and may want to fund a buy-sell agreement via a whole life insurance policy

I think the most important idea to keep in mind here is that whole life insurance premiums are much more expensive than term life insurance (see explanation above).

Of course, it depends on your personal preference and your personal situation to decide whether whole life is the right type of product for you. 

However, if you ask me, I would stay away from this product because most of the time you see much less of a bang for your buck with whole life insurance versus products like term life insurance.

Whole Life Insurance Pros and Cons


Unfortunately, you’ll never find a life insurance product where it’s 100% perfect for your fit. (Yes, it’s sad, I know).

In order to obtain a better image of the attributes of a certain life insurance product, I suggest to start by reviewing the pros and the cons. 

If you can live with the cons, then maybe the product may be for you. 

If not, it might be time to rethink your life insurance strategy.

Below is a list of pros and cons for the whole life insurance policies:

the millennial money woman blog post "whole life insurance pros and cons"

Pros:

  • Guaranteed cash value
  • Premium is level for the life of the insured
  • Guaranteed death benefit

Cons:

  • More expensive initially compared other types of life insurance products
  • Little to no flexibility in the first few years
  • High front-end load costs (cash value won’t’ build until later years)

Hopefully, this pro and con illustration can give you a better idea of why and/or why not whole life insurance may be the right fit for you. 

Closing Thoughts


As you can see, there is certainly no “one answer fits all” type of situation. 

Every scenario is different – and that’s why it’s called personal finance. 

If you are considering purchasing life insurance, you need to evaluate yourself (what are your personal preferences?) and you need to evaluate your current financial situation (do you have enough current cash flow to afford higher whole life insurance premiums?).

Before you commit to any life insurance product – be it whole life insurance or term life insurance for example – I would highly suggest you do your research. 

It will be difficult to retract a commitment once it’s made as it relates to the life insurance industry (in other words, you’ll lose a lot of money).

Your bank accounts will thank me later!

What life insurance products have you considered for your personal financial situation?

Related: Should I invest in my HSA?
Related: How does COBRA insurance work?

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Fiona Smith
Fiona Smith
The Millennial Money Woman was founded by Fiona Smith. She holds her Master of Science Degree in Personal Financial Planning and has co-founded a local non-profit community teaching financial literacy to young professionals.

4 thoughts on “Whole Life Insurance: The Definitive Guide”

  1. Thanks for the detailed and interesting article. In the country where I live (Ukraine), unfortunately, there is not such an abundance of insurance programs and companies (((Our insurers mainly offer life insurance in national currency, and this is a big problem in view of constant devaluation. How good it is when you have a choice ))))

    1. Hi Illia,
      That’s a great point that you bring up – not all countries have access to a variety of life insurance tools. In that case, if you want to pursue financial planning for your situation, it may be worth consulting a financial planner from your country that will know the law specifics of your country as it relates to finance. Good luck – and thank you for the comment!

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