How Do Whole Life Insurance Policies Work?

Whole life insurance is one of the best-known types of life insurance. Unlike a lower-cost term policy, it offers the certainty of coverage for life, provided the insured maintains the premium life insurance payments.

Many whole life insurance policies offer guaranteed death benefits and the option of growing an account value as a savings vehicle. Interest is earned on the amounts contributed, usually on a tax-advantaged basis. The primary function of a whole life insurance policy is to ensure that, when the insured dies, their nominated beneficiary receives a verified death benefit with a cash payout.

However, whole life coverage can also be a flexible financing tool and a financial cushion in the form of a payout to the insured's loved ones. It is often compared to other permanent life coverage options like universal indexed and variable universal life coverage, each with pros and cons to consider about each policy.

Whole life insurance products can help offer financial security, especially where one person's income is fundamental to maintaining the lifestyle family members are accustomed to. The dual aspect of whole life coverage is that, alongside acting as a permanent type of life insurance that offers a confirmed death benefit, it can be used as part of a strategic financial plan:

• Whole life products with an account value element can be used to accumulate interest earnings and grow this feature as an alternative method of saving money.
• Policyholders may be eligible to borrow from their life insurance account value or take loans–bearing in mind that unpaid loans or withdrawals could affect the death benefit value.
• Account values can sometimes be used to help supplement retirement income or offset risks of other forms of financial investment when markets are underperforming.
  

Corporations and businesses sometimes purchase whole life coverage for key employees as a contingency to help provide a financial safety net if someone instrumental to the organization dies. The cash death benefit can be paid to a nominated business partner or beneficiary to protect the residual ownership or enable them to buy back the equity owned by the deceased from their relatives and ensure commercial stability.

Most whole life insurance products generate a confirmed lump sum of money when the named insured dies, regardless of when this occurs. There are subcategories of whole life coverage that can affect the insurance premiums.

• Single premium whole life policies require a one-off premium, typically of a substantial value, to purchase the policy outright. This is usually a type of endowment that requires specialist tax guidance.
• Level payment products are more common, in which the insured pays a static premium throughout the policy's lifespan.
• Limited payment whole life insurance restricts the policy premiums paid to a maximum number, with a higher payment value but for a finite period.
  

Some whole life coverage also acts as modified policies, which offer lower premiums than other more widely available products for an initial period, normally up to three years, followed by higher whole life premiums for the remainder. A modified whole life product may be advantageous for buyers who want the death benefit value and security of permanent coverage but must adapt the premiums paid to accommodate their current financial position.

Provided the product is categorized as a participating policy, any excess contributions made by the insured can be remitted to the individual as dividends, which they can opt to redeposit to improve their coverage level or to cover the cost of the insurance policy premiums.

As a general rule of thumb, whole life insurance is more accessible for younger applicants in good health because purchasing this type of life coverage becomes more expensive in older age and following any health issues. The actual cost of whole life insurance will also depend on the required death benefit, where premiums are naturally higher, the greater the value of the policy.

Some of the potential benefits of whole life insurance include:

• The assurance of permanent coverage that remains valid for life as long as the minimum premium payments are made
• Flexible account values that can be accessed as lump-sum withdrawals, loans (for credit cards, home mortgages, auto loans, student loans, etc), or to cover premium insurance payments
• Verified death benefit values, normally established at the point the life insurance policy is purchased

Many insureds opt for a product with stable insurance premiums, ensuring the coverage cost will not change with time. Others might select a non-level policy to adjust the price of the insurance in line with their earnings expectations.

Before making any final decisions about the right life insurance policy for you or the type of product structure and features you need, it is essential to understand all these variables and the overall cost of your policy.

Are Whole Life and Universal Life Insurance the Same?

No, although both these policies are permanent life insurance options with a confirmed death benefit, they differ in terms of the premiums payable.

Whole life coverage usually does not permit insureds to change the death benefit or pre-agreed premiums following the policy start date. In contrast, universal life enables insureds to change the death benefit and the premiums they contribute.

Is Whole Life Insurance Better Than Term Insurance?

There isn’t a correct type of life insurance product for every person, and the best policy will depend on your budget, expectations, planning, and the level of death benefit you need to cover the financial security of your loved ones. Term life insurance policies are finite, with an end date at which the policy will cease to be active, irrespective of the insurance premiums you have contributed.

Whole life continues permanently, dependent on premium contributions. However, whole life is often more costly than term insurance policies, which may influence your decisions if you require life insurance for a limited period, such as until children reach a certain age.

You can speak with an insurance agent to help you determine which life insurance policy best fits your needs.

How Much Does Whole Life Insurance Cost?

It is difficult to provide an indicative cost as the premiums and rates associated with a whole life policy depend on multiple variables, such as the insured party's medical history, age, and occupation. While older people and those with an adverse health history normally pay higher insurance premiums, this could also be linked to the date at which the insured purchases their life coverage.