- Whole life insurance is permanent and comes with a cash value component — two features that you won't find with term life insurance.
- The cash value acts like a savings account that has the opportunity to grow, but will never dip below a certain level unless the insured person withdraws money.
- Experts generally recommend term life insurance for most people, in part because it's significantly cheaper.
- Whole life insurance is much more expensive than term life insurance, but experts say it may be right for anyone who wants long-term protection, including business owners; a guaranteed savings account; or estate liquidity.
- Policygenius can help you compare life insurance policies to find the right coverage for you, at the right price »
As the name suggests, whole life insurance protects you as long as you live. There's no expiration date, like term life insurance, but it'll cost you.
Whole life insurance premiums can be up to 15 times more expensive than term life insurance for the same amount of coverage, according to the experts at Policygenius, an insurance-comparison site.
If you have the cash flow to afford the cost of whole life insurance, and you want long-term protection, a guaranteed savings account, or money to leave to your estate and heirs, it may be worth considering.
Who should have whole life insurance?
Whole life insurance policies consist of a death benefit and a cash value component. Term life policies are often cheaper, but they don't have a cash value and they could expire before the insured dies, leaving nothing to pass on to heirs.
"Term life insurance is a great financial tool for making sure that a family or business is covered in the event of an untimely death,"John McLean, a certified financial planner and a regional director at Penn Mutual told Business Insider. "There is a place for this type of coverage in virtually every insurance portfolio because of its affordability in the early years."
But for more "permanence and stability," whole life insurance adds "a host of living benefits term life insurance cannot match," McLean said.
With a whole life policy, part of each monthly or annual premium goes to the insurance company and part of it goes toward the cash value, which earns a small, but guaranteed, amount of interest, explains Policygenius. The cash value acts as a forced savings account that the policyholder can dip into to pay for retirement, take out a loan, or even pay the policy premium without affecting the death benefit.
"Whole life insurance offers advantages for anyone whose financial needs extend beyond short-term consideration, including owners of a business, participants in a defined-benefit pension plan, anyone needing estate liquidity to pay estate taxes or transfer expenses, pre or post-retirees concerned about the safety and sustainability of their retirement income, or anyone concerned about their financial legacy impacting their family or charities,"Kurt Jonson, a certified financial planner and managing partner and CEO of Pacific Capital Resource Group, told Business Insider.
Who should not have whole life insurance?
People in the following situations probably don't need whole life insurance:
- Those who don't have dependents
- Those who would struggle to cover the cost of the monthly premium
- Those who expect their dependents to eventually fully support themselves and won't need to leave them money
- Those who are choosing it as a default option instead of as part of a full financial planning strategy
Whole life insurance is expensive, and it's not for everyone. If you're unsure whether it's the right choice for you, you might want to consult a financial planner.
The cash value is a bonus, not a deciding factor
The cash component of a whole life policy can be valuable, especially since any money contributed by the insured can be taken out tax-free, but Policygenius notes that the interest rate is often much lower than what you could earn if the money were invested in another investment account, like an IRA. In other words, it's safe, but usually not the best option for growing your money.
In addition, withdrawing money from the cash value of a whole life insurance policy may result in penalties and administrative fees. And unfortunately, that portion of the money can only be used while the insured is living — it can't be left behind for beneficiaries.
"Whole life insurance is good for those who are looking for more than just death benefits with their coverage," McLean said. "Whole life insurance provides a death benefit that can be counted on, a level premium with flexibility, the accumulation of cash value that can be readily accessed in the event of a planned or unforeseen financial need — all of this with potential tax advantages which should be reviewed with a tax professional."
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