What is Whole Life Insurance and how does it work?

In this article we will go over what is whole life insurance. It is meant as a quick introduction to whole life insurance, if you are looking for more in-depth analysis you should try: Top 7 Whole Life For Cash Value.

Also if you are looking for a better understanding you should read our Whole life insurance for dummies article.

There are a few different types of life insurance. Some of the most common ones are:

  • Term Insurance
  • Universal Life Insurance
  • Whole Life Insurance

There are significant differences between these policies. The main differences are how long the policies last and how long the policies are guaranteed. 

The main feature of a whole life policy is that you have multiple guarantees. The strong guarantees include:

  • Death Benefit: The death benefit will be there forever as long as you pay the premiums.
  • Premiums: Premiums on a whole life are guaranteed to never go up.
  • Cash Value Growth: The cash value on a policy grows on a guaranteed basis.
  • Health Rating: Your health rating will always remain the same for the life of the policy.

These strong guarantees are what separates whole life insurance from the rest of the policies.

Whole Life Cash Value

Some permanent life insurances have this feature called cash value. Cash value is one of the most important features in a whole life insurance.

Cash value is a saving component in your whole life policy that can be accessed at any time. The cash inside of a policy only goes up each year. However at the beginning of the policy there won’t be much cash value to access.

Cash values have a guaranteed rate of return. This rate of return helps the policy grow over the years. Also some whole life’s have dividends on top.

The policies that have dividends are called participating policies.

Whole Life Insurance Dividends

what is whole life insurance

As we mentioned, some whole life insurance policies are participating, that means that they receive a dividend to help the growth of the policy. The most common participating policies are from Mutual companies.

Some of these participating companies pay a dividend as high as 6.4%.

This dividend get’s reinvested and the policy and you do not have to pay taxes as it grows.

You can see how dividends have performed over the years: Whole Life Dividends.

Death Benefit

As we already mentioned the death benefit is guaranteed in a policy as well. However, the dividend can also grow just like the cash value.

You have to understand that as long as the premiums are paid, the death benefit will remain in-force forever.

Other interesting features of the death benefit is that it is tax free.

Paid up whole life insurance

Some policies have a feature that you will only have to make payments for a specific number of years.

After you have completed the payments, your policy is paid-up, and your whole life will remain in-force forever without having to make any more payments.

Typical time frames for a paid up policy are 10, 20 years and until age 65. 

Higher Prices

In reality, most of the features in a whole life also make it more expensive than the rest. But don’t be scared by the higher costs, remember… you get what you paid for.  

Final Word

That was just a quick overview about whole life insurance and some of it’s features. We hope that now you have a better understanding of whole life insurance.

Related Articles:

Whole Life Insurance for Dummies

7 Lies about Whole Life

Participating Whole Life Insurance: Things to Know

Whole Life Insurance and the Biggerpocket Money Interview 

Whole Life Insurance can be a great tool in protecting your family and saving money for future goals.

If you would like to compare the best companies just run a quote here: Whole Life Insurance Quotes

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