What is Whole Life Insurance?

Whole Life Insurance Definition

A type of permanent life insurance policy that has both a death payout and a tax-advantaged investment account. Whole life insurance combines an insurance policy with an investment account. Unlike term insurance, which ends after 5, 10, 20 or 30 years, you can keep a whole life policy until you die, as long as you pay the premiums. Whole life insurance typically has much higher premiums than term life insurance for the same amount of death benefit. A whole life policy might cost $1,000 a year for a $100,000 death benefit, while a term policy might cost a fraction of that, just $250 a year, for a much higher death benefit, such as $250,000. Your policy’s cost depends on your age, health and how much coverage you choose.

Example

Scrooge McDuck has a large estate and wants to leave money tax-free to his heirs, so he purchases a whole life insurance policy. Because the investment component is tax advantaged, and he has maxed out his other tax-advantaged investment options, a whole life policy is the best way for him to accomplish this goal and minimize taxes both now and for his estate after he passes away. The insurance company decides how to invest the money in Scrooge’s investment account, which is okay with him. If he wanted to make his own investment decisions, he would choose a universal life policy, which lets policyholders choose their own investments.

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Tips From First Foundation

Some whole life policies have level premiums, meaning that you pay the same amount for your policy every year, even as you get older. As a result, you’ll pay more than the policy really costs in the early years, and less than it really costs in later years.

If you have a “participating” policy and the insurance company is profitable in terms of its own investments and the number of claims it has to pay, it may issue dividends to policyholders, which are considered a return of premiums.

It is possible to take a loan against your whole life policy, but you’ll have to pay interest on the loan, and if the loan is outstanding at the time of your death, the loan amount will be subtracted from the death benefit and cash value. While the investment component is generally tax exempt, taking a loan from the policy may have tax consequences. Like other types of life insurance, neither you nor your beneficiaries will pay tax on the death benefit.

If you cancel your policy before you die, you will receive its surrender value.

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Last updated Nov 29, 2018