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Eric Stauffer is a former insurance agent and banker turned consumer advocate. His priority is to help educate individuals and families about the different types of insurance they need, and assist them in finding the best...

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UPDATED: Feb 3, 2017

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Although thinking about your death is never pleasant, it’s a good idea to put some thought into how your loved ones will be cared for after you pass away.  This type of planning will give you peace of mind that your family will be financially secure and won’t need to suffer from hardship as a result of your death.

Some insurance policies offer additional investments that can make them very valuable tools for planning your future.  These policies, known as whole and universal life insurance, have cash value and are able to grow over time.  For many people, the additional value of these policies makes them superior to the more affordable term life insurance option.  If you’re considering purchasing a whole life insurance policy, it’s a good idea to do your research and confirm that this is the right investment for your needs.

How Does Whole Life Insurance Work?

To understand your whole life policy, it helps to have a basic understanding of how other types of life insurance work.  By far, the more common type of life insurance is term life.  In term life, you buy the policy for a predetermined amount of time.  If the insured does not pass away during the policy term, a new policy must be purchased.  Any money paid into the policy is lost, and there is no cash value.

Whole life insurance works differently.  Whole life policies are permanent.  Once you purchase the policy, it will continue to protect you for as long as you pay your premiums.  This is valuable for many people as it can be challenging to buy a new insurance policy later in life.  If you have any preexisting health conditions, finding affordable insurance is difficult.  If you can lock into a whole life policy when you’re young, however, you’ll be able to keep it forever regardless of your health.

The other way that whole life insurance policies differ from term life is that whole life policies have cash value.  Every time you pay your premiums, a portion of that payment is invested.  The dividends of that investment strengthen your policy.  This allows the policy to grow in value over time.  It also gives you the ability to use the policy as collateral for a loan, and money can be withdrawn from the policy as well.  For this reason, whole life policies are commonly marketed for children as an investment vehicle for college. (Most notably by Gerber Life.)

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What’s the Difference Between Whole and Universal Life?

Although the terms are often used interchangeably, whole and universal life insurance policies are not exactly the same thing.  Both are permanent life products with a cash value.  Whole life policies, however, are not quite as flexible as universal life insurance.  This makes them a less attractive option for many customers who are looking for permanent life coverage.

In a universal life insurance policy, you can alter your premium payment and change the death benefit amount your beneficiaries receive.  In a whole life policy, you are locked into a set premium and predetermined death benefit.  Upon your death, your beneficiaries would receive the face value of the policy you purchased in addition to any cash value left within the policy.  This money would pass directly to the beneficiaries without going through probate, which can be helpful for some people with complicated estates.

How Much Does Whole Life Insurance Cost?

Like all other life insurance policies, whole life premiums vary depending on your health and other personal factors such as age and medical history.  Before obtaining a policy, you will need to pass a medical exam and medical history check, and this information will affect your premiums.

Once the premiums are calculated, however, your rates will be set indefinitely.  This means that you can apply for whole life insurance at a time when your health is at its peak and continue paying those same rates for the rest of your life.  This is one of the most attractive features of all permanent health insurance policies, and it’s a good reason to get into shape before buying life insurance.

That said, you can expect to pay more for a whole life policy than term policy of the same face value.  Because whole life policies are permanent, the insurance company must collect higher premiums to offset the expense of a claim.  Additionally, the investment portion of the whole life policy means that you pay more into your premiums initially, even if that cash value is liquidated later.

Is Whole Life For Everyone?

Despite the benefits, whole life insurance is not the right choice for everyone.  Some people may find its cost prohibitive or feel that the coverage is “overkill” where a more affordable term policy would suffice.  Others believe that the investment value of a whole life insurance policy is not as high as other types of investments, which may yield considerably higher returns.

There are a few people who can definitely benefit from whole life policies:

  • Individuals who are healthy, but at risk of developing medical conditions later in life
  • People who wish to lock in a set rate and keep it forever, even if it’s fairly high at first
  • Individuals who want dividends on an investment without any tax penalties
  • People who want the option of taking a loan out against a policy or liquidating for cash

Before purchasing a whole life insurance policy, it’s a good idea to consider your individual financial situation and the needs of your family. Getting quotes from multiple insurance companies is the best way to ensure that you receive the best policy without breaking your budget.  

About Eric Stauffer

Author: Eric StaufferI am a former insurance agent and banker turned consumer advocate. My priority is to help educate individuals and families about the different types of insurance they need, and assist them in finding the best place to get it.

12 Comments

  1. I am a retired Air Force and have had VGLI since 1992.

    Does Navy Mutual convert VGLI to Whole Life? I am 69.

    If so, generally what would be the monthly premium for $100K policy?

    Thank you.

    Reply
  2. What are graded final expenses as compared to final expense whole life?

    Reply
  3. What is the current guaranteed interest rate on your whole life policies as well as the guaranteed interest rate on annuities?

    Reply
  4. I have a whole life policy where the premiums are offset by the annual dividends. I would like to know if the figures (cash values & death benefit) that are on the annual statement are considered the “true” numbers, as compared to these numbers on the anniversary “illustration”. The numbers on the statements are of course lower than in the illustration.
    Your expert opinion is much appreciated.

    Reply
    • Hi RT,

      A whole life illustration can vary from firm to firm, so its tough to say definitively what it is going to show, and what it won’t. One of the important things to understand, which I believe is what you are asking, is the difference between the guaranteed numbers and the projected numbers.

      Things like the guaranteed cash value and guaranteed death benefit are just that, the guaranteed amount the insurance company should pay out as it stands when the illustration is issued. Your projected cash value and non guaranteed death benefits are reflections based on things like current dividend forecasts, loans taken against the policy, etc. If these are not clearly labeled as such, I would advise speaking directly with your carrier to get a bit of clarity on which numbers represent what.

      Its possible in your case that you are seeing your guaranteed numbers on you statements, and your projections on your illustration. Again, a call to your insurance company may help clarify what are the guaranteed vs. projection numbers. Hope that points you in the right direction.

      Best,
      Eric Stauffer

      Reply
  5. I had a policy with Monumental my father was paying the premium up until his death not knowing or understanding life insurance and how it works I surrender the policy which had a rider I wasn’t working at the time and I thought it would cancel I didn’t want to lose all the money my parents had paid into it. Wasn’t very smart on my part after finding out I didn’t have to do that. I’m now trying to get a policy but don’t know what I need at this point. I’m 45 and have several grandchildren and 5 children. I would love to be able to leave them the ability to lay me to rest properly and have something for themselves. What would you recommend and where should I go.

    Reply
    • Hi Janine,

      I generally recommend term life, but you can also look into what is called final expenses insurance. Its similar to a whole life insurance policy that covers your final expenses to be laid to rest.

      Best,
      Eric Stauffer

      Reply
  6. I have noticed many sites comparing term vs whole life policies and mention that whole is more expensive. I told an agent we are interested in a whole life policy and not term. He said he can offer what we want to start out as term then we can convert to whole life at the same rate. I don’t think he is being honest why not just put us in a whole life policy to begin with. I don’t want our premiums to go up should we decide to move forward.
    Should I be concerned?

    Thank you

    Sylvia

    Reply
    • Hi Sylvia,

      It sounds like your insurance agent is talking about a convertable life insurance policy. It starts out as a term policy, and has the option to convert to a permanent life insurance product down the road.

      The question is, why do you want a whole life insurance policy? They do fit into certain types of estate planning, but they are regarded in the financial community as very expensive. You can read my take on them here:

      https://www.expertinsurancereviews.com/insurance-education/term-life-better-whole-life/

      Best,
      Eric Stauffer

      Reply
  7. Is there such a thing as “decreasing whole life insurance”? I’m getting the idea from Internet that it’s bogus. This has to do with a student life insurance policy that converted to decreasing whole life in 1985 for me. Do you think it has any cash surrender value? Thank you!

    Reply
    • Hi Kelly,

      I am unfamiliar with decreasing whole life insurance, and a quick poke around the internet did not reveal much. I would be more than happy to give your policy documents a once-over if you would like. Perhaps that could uncover a bit more details.

      You can reach me on the contact page. Click Here

      Best,
      Eric Stauffer

      Reply
    • Yes there is decreasing life insurance. Not whole life but term. It is used sometimes to cover a mortgage

      Reply

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