What is whole life insurance?
Buying life insurance is one of the most important financial decisions you can make for your family’s future. If you should die, life insurance pays money (called a “death benefit”) your loved ones can use to cover your funeral expenses, pay bills, and afford the things you want them to have.
Whole life insurance is one of two major types of life insurance you can buy. (The other is called “term life.”) Like nearly every kind of life insurance, the purpose of whole life is to protect your family financially when you aren’t around.
So how is whole life different from other types of life insurance? Whole life insurance is permanent life insurance designed to last your whole life (just like the name says). Here are some of its other features:
Key features of whole life insurance
- The cost (or “premium”) is set for life and can’t increase even if you get sick—the amount you pay for it stays the same no matter what.
- The death benefit amount can never decrease.
- The policy usually builds cash value over time—see more about that below.
- The cash benefit paid by life insurance is almost never counted as taxable income, meaning your chosen beneficiary (the person or people whom you choose to receive the life insurance money) will pay no taxes on it.
Whole life insurance is generally more expensive than term life insurance because its protection lasts a lifetime.
Whole life and "cash value"
In addition to paying a cash benefit to your loved ones whenever you die, whole life insurance policies usually build something called “cash value,” which can be helpful to you and your family while you’re alive. What is cash value? Every month, part of the payment you make on your insurance policy is put into a tax-deferred account (meaning you don’t pay taxes on it unless you withdraw it).
This money earns interest at a set rate of return, similar to a savings account. You may borrow from this cash value as it grows to help pay for things your family needs. If you don’t borrow from the cash value, your beneficiary will eventually receive the full amount as a tax-free payout. (But keep in mind that loans and interest on those loans will be subtracted from the death benefit payout.)
Combining whole life and other policies
Whole life insurance can be a good choice by itself or combined with other types of coverage. For example, adding term life insurance when your family’s growing can provide a higher level of protection at an important time. Then, when the term policy expires, your whole life policy continues providing lifelong coverage.