Whole life insurance

Also called permanent life insurance, ordinary life insurance

Permanent life insurance with fixed premiums, a guaranteed death benefit for life and a cash value that grows over time.

What it means

Whole life insurance stays in force for the insured person’s entire life as long as premiums are paid. Part of each premium builds cash value, which grows at a guaranteed rate and, in participating policies, may earn dividends that are not guaranteed. Cash value grows tax-deferred.

The policyholder can borrow against the cash value or surrender the policy for it, though loans accrue interest and reduce the death benefit if unpaid, and early surrender often triggers charges. Premiums are much higher than term insurance for the same coverage, and the cash value grows slowly in the early years.

Example

Suppose a $250,000 whole life policy and a $250,000 term policy are offered to the same healthy adult, and the whole life premium is ten times higher. The extra cost funds lifelong coverage and a cash value, which might take many years to exceed the premiums paid in.

How it’s used

Lifelong needs such as estate planning
Providing for a lifelong dependent
Forced, conservative savings for some households

Strengths and weaknesses

Strengths

Coverage lasts for life with fixed premiums
Guaranteed cash value that grows tax-deferred
Cash value can be borrowed against

Weaknesses

Much higher premiums than term coverage
Slow early cash value growth and surrender charges
Policy loans reduce the death benefit if unpaid
Commissions and fees can be hard to compare

Good to know

Asking for the policy’s illustration with both guaranteed and nonguaranteed values shows what is actually promised.

Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.