What is whole life insurance?

By Allstate

Last updated: March 2023

Whole life insurance is a type of permanent life insurance, which means the insured person is covered for the duration of their life as long as premiums are paid on time. Permanent life insurance is different than term life insurance, which covers the insured person for a set amount of time (usually between 10 and 30 years).

Whole life insurance is the most common type of permanent life insurance policy that people purchase, according to the Insurance Information Institute (III).

Like most permanent life insurance policies, whole life also offers a savings component called "cash value." Read on to learn more about the benefits of whole life insurance.

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Whole life insurance policy benefits

Certain aspects of whole life insurance can make it an appealing choice.

  • Your premiums are fixed and will never go up, regardless of market conditions.
  • You may be able to withdraw funds or take out a loan.
  • Your death benefit is guaranteed as long as you make the required premium payments.

Whole life insurance provides fixed premiums and fixed death benefit

In most cases, the premium and death benefit stay constant for the duration of a whole life insurance policy, says the III. A universal life insurance policy, on the other hand, may offer the option to adjust your premiums or death benefit over time.

Because whole life insurance gives you fixed premiums and a fixed death benefit, you won't have to worry about increased premiums as you get older. And, your loved ones will also know how much to expect when your life insurance benefit is paid out after you pass away.

Whole life builds cash value

A whole life policy can serve as a source of emergency funds for you if something goes wrong, or you may be able to take out a loan against the policy. That's because a portion of each premium payment you make is funneled into a savings component of the policy called the "cash value."

Over time, the cash value of your policy increases, and you may have the option to withdraw funds or borrow against it. The rules on how and when you can do this vary by company and policy. Your insurer may also offer guidelines to follow so that you don't inadvertently reduce the policy's death benefit or create a tax burden1.

What is the difference between whole life and term life insurance?

Whereas whole life insurance comes with fixed premiums and covers you for the duration of your life, a term life policy only covers you for a set amount of time – typically between 10 and 30 years. At which point you’d have to renew or purchase a new policy.

Additionally, whole life has a “cash value” component, but term life insurance does not.

What is the difference between universal and whole life insurance?

Both whole life and universal life insurance are types of permanent life insurance policies in that they cover you for your lifetime. The difference is universal life insurance allows you to increase your death benefit or lower your premiums once your policy accumulates enough cash value – while whole life comes with fixed premiums and benefits.

How much does whole life insurance cost?

The cost of a whole life insurance policy depends on several factors, including how much coverage you buy and other things.

When it comes to paying your premiums, you'll typically be able to make a fixed annual payment for a whole life insurance policy. Some life insurance companies may also offer the option to pay monthly, quarterly or twice a year. Be aware, however, that paying premiums more frequently than once per year may incur additional fees.

Using the cash value

Once you’ve accumulated sufficient cash value you, you may be able to withdraw it like you would from any savings account or borrow against it like a loan. You may be able to use it toward paying premiums but using it all up could cause your policy to lapse.

Requirements around how you can use and access cash value may vary from insurer to insurer and policy to policy.

Examples of whole life insurance

A whole life policy gives you lifetime coverage and comes with a cash value component. But there are different types of whole life policies that have specific requirements around cash value, payments and more.

Here are the different types of whole life insurance policies you may come across.

Indexed whole life insurance

The rate at which a cash value account in an indexed life insurance policy grows is typically up to the insurer. For instance, interest may accumulate based on a stock market index of the insurer' choosing, like S&P 500 or the Nasdaq composite.

Variable whole life insurance

A variable whole life policy typically let's you decide how you want to invest your cash. Your insurer may provide a number of investment options and your policy’s value may go up and down as the market fluctuates. While the potential gains may be high, there’s still a risk of reducing your cash value.

Single-premium whole life insurance

A single-premium policy means you pay for your policy in one lump sum instead of in monthly installments. It can be difficult for most people to pay enough money up-front for sufficient coverage, according to Forbes. You may not be able to pay more money toward the policy after the initial payment, either. You can, however, use the cash value as you would with any other whole life policy.

Joint life insurance

Joint life insurance is often sold to couples who want to be covered individually under a single policy. There are typically two payout options: if one person passes, the other receives the death benefit, or the payout is given to a beneficiary after both policyholders pass.

Are whole life insurance premiums tax deductible?

According to the Internal Revenue Service, you cannot deduct premiums you paid for a whole life insurance policy on your tax return.

However, if your beneficiaries receive the death benefit from your policy, they likely would not have to pay federal income taxes on that benefit. However, any interest earned on top of the death benefit will likely be considered taxable income.

Is whole life insurance right for you?

So, when might a whole life policy make sense for you? Life Happens says a whole life insurance policy might be a fit for someone who likes predictability over time. This is because whole life insurance offers death benefit guarantees and fixed premiums.

If you're considering a whole life insurance policy, it may be a good idea to talk it over with your insurer. They can help you review the different options before you make any decisions. That way, you can be confident you've chosen the life insurance policy that works best for you and your family.