Whole Life Insurance: Pros and Cons

Permanent life insurance is the most widely purchased type of life insurance in the United States today, accounting for 60.7% of all individual policy sales, according to the American Council of Life Insurers. Of the several varieties of permanent life insurance on the market, traditional whole life insurance is the most popular.

Whole life insurance provides a death benefit to your heirs, as well as a cash value component that you can access for other expenses. However, it’s typically more costly than term life insurance.

Learn more about the advantages and disadvantages of this type of life insurance.

What Is Whole Life Insurance?

As its name suggests, whole life insurance can cover you for your entire life. That’s in contrast to term life insurance, which covers you for a set period of time, such as 10, 20, or 30 years. If you still need life insurance when the term ends, you have to find new coverage.

Another key difference between a whole life policy and a term life policy is cost, with term policies costing far less. This means that you can buy a term policy with a much larger death benefit for the same amount of money. So while 60.7% of new individual life insurance policies are permanent life insurance, they represent just 29.5% of the total face amount of all new policies.

One reason that whole life insurance is more expensive than term is that whole life also has a savings component, known as its cash value. Part of your fixed annual premium goes to buy insurance, much like a term policy, while another part goes into a reserve account, which will earn interest and grow in value.

You can take out a loan against your policy’s cash value or withdraw the money if you decide to give up, or surrender, your policy. A term policy, on the other hand, has no cash value but simply pays a benefit if you die within the set term.

Whole Life vs. Other Types of Permanent Insurance

In addition to traditional whole life, three other major kinds of permanent life insurance all have an insurance and a savings component. They include:

• Universal life: A universal life policy allows you to raise or lower your death benefit, which will, in turn, affect the premiums you pay. For example, a policyholder might want to buy a universal life policy with a relatively low death benefit at the outset, increase it as their family grows and their income rises, and lower it again once their kids are financially independent.
• Variable life: A variable life policy gives you greater control over how your cash value is invested, typically by offering you a portfolio of mutual funds from which to choose. (With a whole life policy, the insurance company itself makes those investment decisions.) Both the cash value of your policy and your policy’s death benefit can fluctuate based on how well your investments perform.
• Variable universal life: Finally, a variable universal life policy is a hybrid, or a universal and variable policy. Like a universal life policy, it lets policyholders adjust their death benefit, while also allowing them to choose how their cash value is invested, like a variable policy.

Whether a whole life policy is the right choice for you will depend on your personal financial situation.  

Pros of Whole Life Insurance

Permanency

As long as you keep up with the premiums, a whole life policy can last your entire life. A term policy, on the other hand, is good for a certain number of years, after which you’ll typically have to replace it if you still need insurance. By then, you may have more difficulty buying insurance—or getting it an affordable price—due to your age or health issues. However, people whose term policies expire often have more options than they realize for retaining some kind of insurance.

Predictability

With a whole life policy, your premiums stay the same, as does your death benefit. With either form of variable life insurance, you’re subject to the ups and downs of markets. People who are uncomfortable with investment risk and want a permanent policy may do better with whole life.

Tax Breaks

As with the other forms of permanent insurance, the cash value in a whole life policy grows tax-deferred. Insurers in the United Kingdom and Australia also offer investments in insurance bonds, which have some tax advantages to the insured. By contrast, if that money were in a regular, non-retirement investment account, its interest and dividends would be taxed every year. What’s more, life insurance proceeds (the death benefit that goes to the beneficiary) are generally not taxable, so those investment gains may escape taxation altogether.

Potential Loan Collateral

As mentioned above, policyholders can borrow against the cash value of their policies after a certain point. That could be useful in a financial emergency for someone who has exhausted all other sources for borrowing. And, unlike other kinds of loans, they don’t have to pay the money back if they can’t or choose not to. However, there are some major caveats here—one of which is that the policy’s death benefit will be reduced accordingly if they die before paying it back.

Cons of Whole Life Insurance

Higher Cost

Compared with term life insurance, whole life insurance is costly—five to 15 times as expensive, according to an Investopedia estimate. One reason is that part of your premium goes to fund that cash value account. Another is that insurance salespeople typically receive larger commissions for selling whole life policies than term policies.

Smaller Death Benefit

Whole life is more expensive than term life, and you will receive a lower death benefit than you could get with the same amount of money with a term policy. So, if you need a lot of insurance coverage for a set period of time—as you might if you have a young family dependent on your income—you may find that term life insurance better fits your needs.

Lack of Investment Control

With a whole life policy, the insurance company chooses how to invest the cash value part of your policy. If you are an experienced investor and are comfortable taking on some additional risk, you might prefer to invest that money on your own.

That is why one strategy suggests you “buy term and invest the difference.” With this method, you invest the difference between the cost of similar term and whole life insurance policies. In another option, a variable policy provides some investment options, but they’re limited to the funds that the insurance company offers.

The Bottom Line

Whether or not whole life insurance is right for you depends on your individual needs. It’s more expensive than term life insurance, so for the same amount of money, your death benefit will be smaller. Nevertheless, it’s yours for life, so you don’t have to worry about it running out.

If you need more protection earlier in life—say, for a growing family—then term life probably makes more sense. If, however, you want a legacy to leave for your heirs, then it can be worth buying a whole life insurance policy.