Whole life insurance is differentiated from other types of life insurance policies in that they cover the insured for the entirety of his or her life. Unlike a term policy, there is no expiration period which causes all of the premiums to be forfeited if the policy has not been used – due to the death of the insured. A whole policy builds value over time, allows the policy-owner to invest a portion of that cash value, and allows the policy-owner to borrow against the policy.

What is whole life insurance?

As the name implies, a whole life policy covers the insured from the time that he or she initiates the policy until the time of that person’s death, assuming that the premiums have been paid in full – for one’s “whole” life. An important feature of this type of policy is that a portion of the premiums are invested on behalf of the policy holder. The return of that investment accrues for the benefit of the policyholder and allows the policy to build cash value over time. That cash value, while subject to various restrictions, may be withdrawn, used to pay future premiums, may be invested or may be borrowed against. The premiums tend to be higher than for other types of policies, but the death benefit and the premiums tend to be fixed over time.

Are there different types of whole life insurance policies?

Yes, there are a variety of whole life insurance policy types that include traditional, interest-rate sensitive, and single-premium. Under a traditional whole life policy, one is typically given a guaranteed minimum rate of return on the cash portion, while in other cases, the policyholder has discretion over which of a family of investment funds the money is placed in. With an interest-sensitive policy, the returns are tied to interest rates and have a variable rate of return that is tied to the health of the overall economy. This type of policy offers greater flexibility, as the policyholder has the option of raising the death benefit or adjusting other features depending on the performance of the underlying investment. A single-premium policy is designed for someone able to pay for the entire policy in a single payment. This allows the purchaser to get the death benefit and the tax advantages without having to wait for the ramp-up and accrual period.

Why choose a whole life policy over another type of life insurance policy, including a term life policy?

The primary benefit of a whole life insurance policy is that it builds cash value over time. A portion of one’s premiums goes toward the cash value that is available for investment. This value is why the premiums tend to be higher, but they remain fixed over the life of the policy. Furthermore, the benefits never change, there are no further medical exams ever required, and there is still flexibility to manage one’s investment once the policy has built value.

Should I purchase a whole life policy for an investment?

Insurance policies tend to offer lower rates of return on a dollar-for-dollar basis than other types of investments because a portion of the money being paid is going toward to the premiums on the policy. As a pure investment, therefore, more suitable choices exist that can offer similar tax advantages and more favorable return profiles. If, however, one is in need of life insurance anyway, then considering a whole life policy as an alternative to a traditional term policy may be worth considering. They have advantages as both an investment and as an insurance policy, so considering them when carefully comparison shopping is prudent.