The decision to purchase a life insurance policy is a big step toward protecting against life's risks, but knowing what policy best fits can seem overwhelming. Whole life insurance policies can seem complex, but simplifying these policies into lists of pros and cons can add a lot of clarity and simplicity to the decision. While these policies differ slightly from company to company, these whole life insurance benefits and drawbacks are consistent throughout all whole life policies and can simplify the decision-making process.
Whole life policies offer long-term coverage with a separate cash value that grows over time.
Whole life policies have several cons surrounding cost and the growth rate for the cash value amount.
Whole life policies offer safe investment options when compared to other permanent life policies.
Whole life insurance policy: what is it?
Whole life insurance is part of the broader category of universal life insurance policies. Whole life insurance is a policy that lasts the insured's life as long as they continue to pay the policy premiums. This means that once the insured finishes the application process, they will not have to undergo it again unless the insured ends the policy.
For whole life insurance, a portion of the premiums is used toward funding the policy’s cash value. The insurance company invests the cash value portion of this policy, and the dividends cause the cash value to grow over time. The insured can use this cash value as a “living benefit.” The insurance company manages the cash value and typically has a guaranteed return on the investment dividends.
Whole life insurance benefits and drawbacks
No life insurance policy is perfect for everyone. Each policy has advantages and disadvantages that may be more or less relevant for the insured, depending on their circumstances. This is the benefit of having so many different life policies - insureds can better tailor their coverage to meet their needs. So what are the pros and cons of whole life insurance? We have curated the chart below to highlight what we believe to be the most significant pros and cons.
Comparing whole life insurance vs. other permanent insurance
Whole life insurance is certainly not the only option for permanent insurance. Each type of permanent insurance may provide coverage for the entire life of the insured as long as the policy doesn’t default due to lack of funds, but each policy approaches coverage differently and has unique benefits and drawbacks.
Universal life insurance
Universal life insurance is similar to whole life in that the cash value of the death benefit grows. This benefit also has a guaranteed growth rate. However, these growth rates are typically less conservative than a whole life policy and can grow more rapidly if investments do well or plummet if they do poorly.
Guaranteed universal life insurance
Guaranteed universal life policies are whole life, permanent insurance. This type of policy is a mix of term and universal life insurance, and there is a cash value component in the policies. The "Guaranteed" part means that as long as you pay your premiums on time, you're guaranteed to have coverage for your entire life or up to a certain age that you choose when you buy the policy. This type of policy is about locking in your coverage and your premium rates for the long haul. Just make sure to keep up with your payments.
Term life insurance
Term life is different from whole life insurance as it doesn't have a cash value benefit or last the lifetime of the insured. Instead, term life policies take a simplistic approach, offering life insurance coverage for a set time. Because the coverage period is limited, these policies often provide high death benefit amounts at a much more affordable premium rate.
Variable life insurance
Variable life is similar to whole and universal life, offering cash-value benefits. The investment decisions for the policy's cash value are typically controlled by the insured and considered the most aggressive investment style of the different forms of permanent life insurance.
Final expense insurance
The final expense can be a whole life insurance or a permanent life policy. These policies are often intended for funeral expenses and offer a lower coverage amount for a lower premium cost. Sometimes, these are even managed by funeral directors. The cash value interest amounts are typically low as well.
Pros and cons of whole life insurance
While we have previously listed the advantages and disadvantages of whole life insurance, it's essential to understand what these pros and cons mean. Many of these need a deeper look to provide deeper context and help determine whether these are relevant to an individual.
Cash value predictability. Whole life insurance policies offer the most conservative form of cash value investments for a policy. This means insurance companies can offer guaranteed rates so the insured can measure the growth of the policy.
Tax breaks on the cash value. The cash value of a whole life policy also holds some tax breaks for the insured. The cash value amount functions similarly to a tax-deferred savings account. All of a policy's cash value is tax-deferred, but any earnings off of the interest of the cash value would be taxed. This means that when an insured withdraws the cash value of the policy, the cash value amount isn't taxed. The insured only has to pay taxes on the cash value's accrued interest.
Lifelong coverage. This is perhaps one of the most significant benefits of whole life policies. Once an insured undergoes the underwriting process and receives coverage approval, they have coverage. This means if the insured were to contract a life-threatening disease or discover a medical condition, they have the coverage for as long as they maintain the policy.
Living benefits. The living benefits of the policy can range from company to company. However, the most notable benefits are that the insured can take out a loan against the amount of the cash value, withdraw the cash value, or use that amount to pay for future premiums. Other policies may even permit the insured to use a portion of the death benefit for severe medical conditions, depending on the terms.
Simple to manage. Whole life policies are easier to manage than permanent life insurance policies. The insurance company manages cash value investments for the insured, meaning that the policyholder can worry less about how and where to invest.
Higher premiums. Whole life policies often have higher premiums than term life insurance. With the longevity of the policy and the benefits that come with the coverage, whole life policies are simply more costly than term insurance.
Smaller death benefit. Likewise, term policies often offer higher coverage limits. Whole life policies are often more limited as insurance companies consider the high likelihood that they will need to eventually pay the death benefit.
Lack of investment control. Whole life policies have a cash value and guaranteed returns. The disadvantage of whole life insurance is that the insurance company controls where the cash value is invested, meaning the insured will have less control and customization in this area.
Modest cash value growth. Because cash value investments are reserved, the cash value growth is also reserved. This is especially the case in comparison to policies such as variable life insurance, which allows insureds to make riskier investments.
Which life policy is best?
After covering so many policies, it may be tempting to be told which policy is the best. Unfortunately, this is unrealistic, as different insurance companies are created to serve various insureds’ diverse needs. However, whole life insurance seems to be an excellent option for those looking for long-term coverage with some opportunities for low-risk investment. To make further determinations, insurance companies generally have agents available to speak with and determine one’s insurance needs.
Why is whole life better than term life?
Whole and term life policies are beneficial in different circumstances. Whole life can be better for those looking for long-term coverage with some safe investment opportunities.
What is the main disadvantage of whole life?
The main disadvantage of whole life is the expense of a long-term policy. Because the insured is paying for the death benefit and the cash value of the policy, the insured can expect to pay more in the long run.
What is the best kind of life insurance?
It is impossible to choose a perfect policy for all people. Whole life is an excellent option for those looking for a cash-value policy, but insureds should speak with an insurance agent to determine their needs.