What Is Whole Life Insurance?

When you’re looking for life insurance, one of the coverage options available is whole life. With whole life insurance, the insured person is covered for the remainder of their life, as long as they pay the premiums on time. That differs from term life, with which a policy is only valid for a specific number of years.

Another feature is that whole life insurance policies may accrue a cash value over time. Any interest earned is also tax-deferred, and it’s often possible to draw or borrow against the cash value that’s accumulated.

If you’d like to learn more about it, here’s a closer look at whole life insurance.

How Does Whole Life Insurance Work?

Whole life insurance is a death-related benefit. When the person covered by the policy passes away, listed beneficiaries receive funds based on what’s outlined in the agreement. There’s also a savings component to whole life policies, generating a cash value for the policy. With the savings aspect, tax-deferred interest can accrue on the balance.

The cash value also creates opportunities for withdrawals by the policyholder. Additionally, it’s often possible to get a life insurance loan, letting the policyholder borrow against the policy’s cash value. However, those can both lower the amount available to beneficiaries after the covered person’s passing.

Limited payment whole life insurance has a shorter premium payment period, but the monthly premium payment is usually higher than it is with level payment options. Finally, there’s modified whole life insurance policies that feature lower premium payments initially but have higher premiums down the road. 

Do You Need Whole Life Insurance?

Everyone has unique insurance needs, so whole life policies may make sense for some but not for others. Often, high-net-worth individuals find these policies beneficial, particularly if they’re maxing out their retirement plan contributions every year. It creates another way to capture tax-deferred savings, and they can tap any existing cash value later in life if the need arises.

Individuals with a lifelong dependent — such as a child with a disability that prevents them from working — may also find whole life insurance policies attractive. They can help ensure that the lifelong dependent is financially supported even if their primary caregiver passes.

With the cash value component, whole life insurance can also help beneficiaries deal with estate taxes if the estate is worth more than the federal exemption limit. Similarly, it can make state-levied estate taxes easier for heirs to shoulder.

Tips for Selecting a Whole Life Insurance Policy

As with all types of life insurance, it’s critical to choose the best policy for your situation. Typically, you want to begin by determining your coverage needs, as that lets you set the value of the associated death benefits. Additionally, compare interest rates among the various providers, as some may offer more than others.

However, spend time researching the reputation of the insurer, too. Histories of good customer service and little difficulties making withdrawals or managing claims after a person’s death are essential, ensuring any processes don’t end up more complex or arduous than necessary.