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Whole Life insurance

How Does Whole Life Insurance Work?

July 31, 2023
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Whole life insurance is a type of permanent life insurance. It lasts the insured’s entire life and provides steady cash value growth. Certain policies can also earn dividends.

In this guide, you’ll learn how whole life insurance works, how much it costs, and when it makes sense to have coverage.

What Is a Whole Life Insurance Policy?

Whole life is a popular permanent coverage option that lasts for your entire life, meaning your beneficiaries receive a death benefit payout no matter when you die. It also carries fewer risks compared to other permanent policies.

Whole life insurance is uniquely stable and secure because it offers benefits including:

  • Guaranteed level premiums
  • Guaranteed death benefit amount
  • Guaranteed cash value growth rate

Types of Whole Life Insurance

There are two types of whole life insurance to choose from:

  • Participating: These policies earn dividends based on the insurance company’s profits and financial performance.
  • Non-participating: These policies are often cheaper than participating because they don’t earn dividends.

How Does Whole Life Insurance Work?

A life insurance policy involves several parties with distinct roles and responsibilities.

  • The policy’s owner pays premiums and controls all maintenance and changes.
  • Policy rates are determined by the person’s life it ensures– the insured. When they die, the policy pays out its death benefit.
  • The policy owner designates beneficiaries to receive the payout. They’re the only ones who can legally claim it.
  • The life insurance company provides coverage, collects payments, and pays death benefit claims.

Whole life insurance has specific features differentiating it from other types of life insurance, such as guaranteed cash value growth and potential for dividends. Let’s explore how whole life insurance works.

Coverage Never Expires

When you purchase a whole life insurance policy, coverage begins the day you buy it and lasts until you pass away.

Lifelong coverage has many benefits, including:

  • Ensuring loved ones are financially protected no matter when you pass away.
  • You can leave the death benefit for your family, an education fund, or charitable contributions.
  • Peace of mind for you and your loved ones.

Cash Value Growth

A whole life insurance policy’s cash value is like an interest-earning savings account. When you buy one, the insurance company sets a guaranteed interest rate.

There are two sides to consider:

  • Advantage: Cash value will grow steadily, and it’s low-risk.
  • Disadvantage: The rate is conservative (between 2-4%) and won’t increase.

With a savings account, you can typically withdraw money at any time and you don’t have to repay it. Whole life cash value has different rules. You can access it by borrowing against it through policy loans.

How does a policy loan work?

  • Typically, up to 90% of the cash value is available to borrow.
  • Loans can reduce the death benefits, amounts credited to the cash value account, and dividend earning potential.
  • You pay interest on the loan, but these rates are often lower than bank or credit loans.
  • There is no income tax.
  • Policy loans are not reported to credit bureaus.
  • There is no repayment schedule. You can pay it off during your lifetime or opt to have the balance taken from the death benefit when you die.
  • Your policy will terminate if the loan plus interest ever exceeds the cash value.

If you terminate your policy later, you can receive the accumulated cash value as a surrender payout. However, this amount is reduced by any applicable surrender charges and unpaid policy loans.

If you choose a whole life insurance policy where you pay premiums regularly instead of one single payment, you usually can’t access the cash value within the first few years. This is because the cash value at this time is generally too low to cover the policy costs and keep a safety net if you decide to borrow money against it.

Whole Life Payment Options

Whole life insurance provides coverage for the insured person’s whole life. Typically, it also means you need to pay premiums for your entire life, but not always. There are three payment options for whole life insurance:

  • Ordinary
  • Limited-pay
  • Single-pay

Ordinary Whole Life

Also called continuous premium or continuous pay, ordinary is the most common payment choice and the default if you don’t specify otherwise.

In this case, you pay fixed premiums at regular intervals (such as monthly, quarterly, or annually) for the policy’s duration. It’s considered the most basic option.

Limited-Pay Whole Life

Limited-pay means your premiums are scheduled for a specific number of years, like 10, 15, or 20. Some insurers also allow payments to last until you reach a certain age, typically 60, 65, or 70.

Key points to know about this method:

  • Limited-pay requires fewer premium payments than continuous-pay.
  • Premiums for limited-pay policies are fixed, but they are higher compared to continuous-pay.
  • Limited-pay policies accumulate cash value faster than continuous-pay.
  • If you pass away earlier than expected, your total premiums paid may be higher than if you chose ordinary.

Single-Pay Whole Life

With single-pay whole life, you only have one lump sum payment, and the entire policy is paid up. This means you’ll have coverage for the rest of your life and never pay a premium again.

The purpose of this strategy is for rapid and significant cash value accumulation.

This payment option is typically only affordable for a small number of individuals due to the large upfront cost.

Death Benefit

The death benefit is a key component of a whole life insurance policy, guaranteeing a payout to your beneficiaries when you pass away. This benefit is usually tax-free and can be used however they wish.

Factors that can impact the death benefit:

  • If you have an outstanding policy loan when you die, it’s taken from the death benefit.
  • If you surrender your whole life policy for its cash value, your policy is terminated, and your beneficiaries don’t receive a benefit.
  • If your premium payment is due and you die during the grace period, it’s taken from the death benefit.
  • If you have a participating whole life policy and use the dividends to buy additional coverage, your beneficiaries’ total death benefit increases.


As mentioned earlier, two whole life insurance options exist: participating or non-participating.

Participating whole life insurance policies allow policy owners to share in the insurance company’s financial success. This comes in the form of dividends, which are a share of the company’s profits.

These dividends are not guaranteed and vary based on the insurance company’s performance. As the owner, you choose how you want to receive/use the dividends. Your options include:

  • Receive dividends as cash.
  • Use dividends to pay premiums.
  • Use dividends to buy term life insurance.
  • Leave dividends with the insurer to earn interest over time.
  • Use dividends to overpay premiums so your policy is paid-up faster and accelerates cash value growth.
  • Use dividends to buy fully paid-up additions– essentially separate mini-policies within the main whole life policy.

The Cost of Whole Life Insurance

Whole life insurance is known for being one of the more expensive types of life insurance because of its valuable features.

In addition, participating whole life will typically have higher premiums than non-participating because of the dividend possibilities. Consider the example rates in the table below.

Monthly Quotes for a $100,000 Life Insurance Policy, Healthy Male Age 40
Participating Whole LifeNon-Participating Whole Life

The cost of a specific whole life insurance policy is influenced by several factors related to the insured, such as gender, age, and health. And the larger the desired death benefit, the higher the premium payments will be. Consider the example rates in the table below.

Monthly Quotes for a Whole Life Insurance Policy (Non-Participating)
Applicant: Male, Age 40; Risk Class: Preferred Plus
Coverage (Death Benefit) AmountMonthly Premium

Explore other life insurance policy options and their monthly costs in 2023.

Factors That Impact Whole Life Insurance Rates

The insurance company underwrites your application after submission. The younger and healthier someone is, the better their rate.

Every applicant is assigned a rate class based on their risk factors. The most common risk classifications fall into one of three groups:

  • Preferred classes are reserved for the healthiest individuals and offer the best pricing.
  • Standard risk classes are for people with average health and life expectancy.
  • Substandard classes are for high-risk individuals.
  • Tobacco users have their own standard and preferred classes.

As an example, consider the table below. These are non-participating whole life insurance quotes for a 40-year-old male.

Monthly Quotes for a Whole Life Insurance Policy (Nonpar)
Applicant: Male, Age 40; Coverage: $250,000
Rate ClassMonthly Premium
Preferred Plus$223.78
Standard Plus$243.89
Tobacco Preferred$321.13
Tobacco Standard$339.94

It’s best to buy a life insurance policy as soon as you realize you have a need. Age plays a significant factor in the cost of a policy. Consider the table below. 

Monthly Quotes for a Whole Life Insurance Policy (Non-Participating)
Coverage: $250,000; Risk Class: Preferred Plus

Pros and Cons of Whole Life Insurance

Like any financial product, whole life insurance comes with both advantages and disadvantages. It’s important to be aware of these pros and cons when choosing the type of life insurance to purchase.

Advantages of Whole Life Insurance

  • Lifetime coverage
  • Cash value accumulation
  • Fixed premiums
  • Dividend earning potential
  • Tax benefits

Disadvantages of Whole Life Insurance

  • High premiums
  • Limited flexibility
  • Features are complex
  • Long-term commitment
  • Slow cash value growth

Differences Between Term and Whole Life

Before choosing a life insurance policy, you must understand the differences between term and whole life insurance.

  • Price: Term life insurance is typically much cheaper than whole life insurance.
  • Coverage length: Term life insurance provides coverage for a specific period, or term, varying from 10 to 40 years. On the other hand, whole life insurance guarantees coverage for your entire lifetime.
  • Cash value: Unlike whole life insurance, term life insurance has no cash value component.

While whole life insurance can provide lifelong financial peace of mind, it’s not financially feasible for all families. The high cost of coverage may outweigh its benefits. This is why term life insurance is the most popular choice by families.

It’s important to carefully think through your life insurance needs and finances to determine which type is best for your unique situation.

See what you’d pay for life insurance

Comparison shop prices on custom coverage amounts from the nation’s top carriers with Quotacy.

Why Buy Whole Life Insurance?

While term life insurance is often the best choice for families, there are many cases in which whole life insurance is very beneficial.

Estate Planning

If you have an estate worth millions of dollars, whole life insurance can help make property transfer easier for your heirs after your death.

  • Liquidity for taxes: When a person with a sizable estate passes away, their heirs may be liable for significant estate taxes. The money received from the policy can be used to pay these taxes when due.
  • Estate equalization: The death benefit can equalize inheritance if a large estate has multiple heirs and complex assets.
  • Wealth transfer: Pass wealth on to beneficiaries outside the probate process through the death benefit.

Individuals With Lifelong Dependents

If you have dependents who will rely on you long-term, like a child with special needs, aging parents, or a non-working spouse, then whole life insurance will provide that long-term financial security.

Business Owners

Whole life insurance can help business owners secure funds, safeguard operations, and ensure long-term stability.

Whole Life Insurance FAQs

Whole life insurance is a complex financial product. Quotacy is here to help answer any questions you may have.

Is Whole Life Insurance a Good Investment Strategy?

While whole life insurance has a cash value savings account, it should not be considered an investment strategy.

Life insurance is primarily a tool to provide a financial safety net for loved ones.

Are Whole Life Insurance Premiums Tax-Deductible?

Your premiums are not tax-deductible if you’re buying a personal whole life insurance policy.

There are exceptions, however, in certain business situations. For example, if a business purchases a whole life insurance policy on a key employee to protect against losing that employee, the premiums may be deductible as a business expense.

Can I Buy Whole Life Insurance If I Already Have Term?

Yes. You can own more than one life insurance policy.

It’s common to own both term and whole. Life insurance covers many temporary financial responsibilities, like a mortgage or the cost of raising children, are temporary. Purchasing a substantial term policy for these financial needs can be cost-effective.

Universal life insurance is another type of permanent coverage people buy. Learn how universal and whole stack up

Request Whole Life Insurance Quotes Today

As an independent broker, we don’t work for insurance companies. We work for you. In addition, our agents don’t work on commission. We’re here to help you find the best policy for you and your family.

Whole life insurance has unique benefits to help you provide financial security to those you love most. If you want permanent life insurance, contact us for a personalized whole life quote.

If you aren’t sure which type of life insurance is best for you, contact us for a needs analysis. Buy confidently through Quotacy.

Note: Life insurance quotes used in this article are accurate as of July 31, 2023. These are only estimates and your life insurance costs may be higher or lower.


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