Who Needs Whole Life Insurance Coverage?

If you think you don’t need life insurance, think again. With this type of policy in place, you have the ability to make sure your loved ones get what they need to live comfortably after you pass away. It’s not pleasant to think about your death, but it’s important to make sure the people you value most have what they need after you’re gone. Life insurance is designed to do that.

Not all life insurance is created equal. When you shop for a policy, you’ll find you have some options. The two most common types of life insurance — whole life insurance and term life insurance — have key differentiators. In this article, we’ll give you an overview of the former so you know what to expect when buying a whole life insurance policy and how it differs from term coverage.

Whole life insurance, like term insurance, will pay your beneficiaries a specific amount of money upon your death. The primary difference between term and whole life insurance policies is that term policies provide coverage for a set period (10 or 20 years, for instance), while whole life insurance pays its benefit as long as premiums have been paid.

In this article

    How does whole life insurance work?

    What is whole life insurance? It’s an insurance policy that pays the people you name (your beneficiaries) a set amount of money (your death benefit) when you pass away.

    The key difference between whole life insurance and term life insurance is how long the policy lasts. When you buy term coverage, you pay for a policy that lasts a certain amount of time (the term). If you buy a 30-year policy and don’t pass away by the end of the policy’s term, the policy expires and your family gets nothing. Most term policies can be converted to whole policies at the end of the term.

    When you choose whole life insurance, you get a policy that lasts your entire life. Generally, whole life insurance policies are more expensive than term policies, but many people like knowing they won’t have to worry about the policy ending after a certain amount of time.

    Whole life plans can contain a cash value feature. This is a portion of your policy that earns interest. You can borrow from this cash value should an unexpected need such as medical expenses arise while you’re still alive.

    You pay for a whole life insurance like you do any other insurance policy: with premiums. This is the amount you pay your insurance provider, usually on a monthly or annual basis, to keep your policy active. If you get whole life insurance with a cash value feature, part of your premium goes toward your death benefit while the other portion goes toward that cash value and accrues interest. Your premiums are fixed, meaning they won’t increase over time. The rate you pay when purchasing your policy is the same rate you’ll pay later in life.

    Most life insurance companies will offer whole life insurance options.

    What are whole life insurance features?

    As you’re comparing the types of life insurance to decide which is right for you, consider these key features of whole life insurance:

    • Permanent coverage: A whole life insurance policy lasts the entirety of your life. You don’t have to worry about the policy expiring and the premiums you paid toward it disappearing.
    • Cash value: Your whole life insurance policy can include a cash value component, allowing you to apply a portion of your premiums toward an account that accrues interest over time and from which you can borrow against if needed.
    • Death benefit: This is the set amount of money your whole life insurance policy will pay out to your beneficiaries at the time of your death. You can decide how much you want your death benefit to pay, but the higher you set this benefit, the more your policy will cost.
    • Set premiums: When you buy a whole life insurance policy, your premiums don’t change over time. If you buy this policy when you’re young and healthy, you usually can enjoy lifelong coverage at a lower rate.

    These benefits may be worth enough to you that you won’t mind paying higher premiums compared to term life insurance.

    Whole vs. term life insurance

    Now, let’s compare those features against the ones delivered by a term life insurance policy.

    Whole life insurance
    Term life insurance
    Permanent coverage
    Death benefit
    Cash value component*
    Lowest cost 
    Set premiums*
    Best for
    • People who want a permanent life insurance policy.
    • People who want a cash value component to provide a source of money if needed later in life.
    • People who want the most affordable life insurance possible.
    • People who only want life insurance to cover a specific time period (e.g., the length of your mortgage).

    *With most policies

    Benefits of whole life insurance

    Once whole life coverage has been issued, it cannot be revoked, reduced or cancelled except in cases of non-payment or fraud. This makes whole life insurance appealing because it provides a degree of certainty. The primary advantages of whole life insurance are:

    • Protection for life – It doesn’t expire or go down in value.
    • Level Premiums – The rate you pay for your policy will never increase.
    • Cash Value – A portion of your premium builds cash value which can be borrowed against.
    • Guaranteed Death Benefit – The amount your loved ones receive is guaranteed.

    Once whole life coverage has been issued, it cannot be revoked, reduced or cancelled except in cases of non-payment or fraud

    The decision to purchase whole life insurance rather than term is a personal choice and depends on your finances, age, and coverage goals. The first part of the decision-making process when it comes to choosing between whole life and term is cost. Whole life policies cost significantly more than term policies for the same amount of coverage. Although that cost is guaranteed to remain level, your main concern should be with having adequate coverage when you need it.

    The process of deciding whether or not to purchase a whole life policy begins with determining your life insurance needs. The American Institute of Certified Public Accountants 360 Degrees of Financial Literacy website offers a Life Insurance Calculator to help you determine how much coverage you should have.

    Whole life policies cost significantly more than term policies for the same amount of coverage

    Balancing benefits with costs

    The cost for whole life coverage can be six to eight times more than comparable term coverage making this a real bottom line issue for many insurance consumers. Although cost is a crucial factor, it doesn’t have to present an all-or-nothing scenario. Balancing need with cost can mean purchasing a mix of convertible term and whole life may be your best solution rather than joining the ranks of the 30% of Americans without any life insurance coverage.

    According to a study cited by the Life Insurance Settlement Association, overreaching personal budgets are a major reason why enrollees surrender their life insurance policies or allow them to lapse. The benefits of a whole life policy are only benefits as long as you keep the policy. When circumstances are right, the benefits of whole life insurance outweigh the added cost.

    The cost for whole life coverage can be six to eight times more than comparable term coverage making this a real bottom line issue for many insurance consumers…[balance] need with cost

    Living benefits

    Cash value, unlike the death benefit, is one you can use while you’re are alive to borrow against or use to reduce (even eliminate) premiums down the road. The cash value of a whole life policy accumulates at a tax advantage basis, which means the money you withdraw is not taxed until the amount you withdraw exceeds your basis (the amount you have already paid in).

    Another tax advantage of this type of policy is the payment of dividends by many insurers. Dividends are generally taxed as gains; in the case of life insurance, however, the IRS treats dividends as a return of premium and they are not taxable.

    The cash value of your policy is special in other ways; it can be borrowed against or from the insurer, or used as collateral for a third party loan. Cash value is also shielded from creditors by virtue of the fact that the insurance is ultimately intended to benefit someone other than you — and that protection extends to the cash accumulated in the policy.

    Who should get whole life insurance?

    If you have dependents, you should consider whole life insurance. With this coverage, you can cover the needs of your children, partner or anyone else for whom you provide.

    Some instances in which people purchase this type of coverage is when:

    • You want to ensure your family isn’t burdened by funeral expenses, which cost an average of $7,000.
    • You have a child and want to make sure they have enough money to get an education.
    • You own a home and want to make sure your family can cover the mortgage without you.
    • You have someone cosign a loan or credit card and want to make sure you don’t leave them with debt.
    • You are married and want to provide for and protect your spouse.
    • You want to protect the inheritance you’re leaving to your loved ones and have concerns they may need to sell a part of your estate after you pass.

    People often think that you only need to buy life insurance if you’re the breadwinner. Don’t discount how much value you provide your family if you stay at home. The cost to cover childcare, transportation, errand running, cooking and all the other day-to-day things your family needs adds up. With life insurance, you can ensure your loved ones get the support they need should you pass away.

    A whole life plan — and the peace of mind it provides — probably isn’t as expensive as you think. In fact, the Insurance Information Institute (III) says that people often overestimate the cost of this coverage, with Millennials expecting a cost as much as five times the actual price of a life insurance policy. So, if you’d like to give yourself some peace of mind by protecting your loved ones’ future, gather quotes for a whole life insurance policy.

    Choosing the right policy

    Other factors — such as age and health — may contribute to offsetting the higher cost of whole life versus term. For this reason, each passing year can also mean an increase in premium cost for the same level of coverage. As permanent insurance, the premium at the time of issuance will remain constant for the rest of your life.

    The advantage of permanent insurance is that your health at the time the policy is issued will dictate the terms of your insurance for the rest of your life. This factor is particularly relevant once we reach middle age. Knowledge of your family’s medical history is also valuable because it can influence your decision to purchase a policy before any hereditary conditions or ailments begin to affect you.

    Kacie Goff

    Contributing Writer

    Kacie Goff is a personal finance and insurance writer with over five years of experience covering personal and commercial coverage options. Kacie founded Jot Content, a full-service content agency, in 2018. She lives in Ventura, CA, with her husband and dingo-look alike dog, Babou. When she’s not writing, you can find Kacie practicing yoga, working in her garden or scoping out a new happy hour.