What is Whole Life Insurance?

So you have heard you should never buy Whole Life Insurance?  Is whole life as bad as everyone wants to make it out to be?  Stick with us and we will sort it out for you.  Should you buy a whole life insurance policy for yourself or a loved one?  We will give you the tools to answer that question here in our guide.

What is Whole Life Insurance? Should I buy it?

How does a whole life insurance policy work?

A whole life insurance policy literally covers you for your whole life, no matter if you live til 21 or 121!  This is a form of permanent policy also known as cash value life insurance.

These policies build cash value over time that you can borrow from later in life.  More on this a little later on.

The premium for whole life insurance is level, it stays the same for the rest of your life.  This is a critical factor for planning.  A policy with rates that fluctuate probably isn’t a good thing when you have retired and on a fixed or limited income.  Many people have lost a life insurance policy late in life when the premium unexpectedly skyrocketed.

There several types of whole life available but the basic structure is very similar.

Common Types of Whole Life Insurance

  1. Participating Whole Life
  2. Non-Participating Whole Life
  3. Limited Pay Whole Life
  4. Single Premium Whole Life
  5. Final Expense Whole Life

Ok, so what does that mean and how does it impact the policy?  That is a great question we will dig deeper into that soon.

Before we explain each of the types lets discuss how they are all similar.

A cash value policy builds up a savings component inside the life insurance policy.  This cash value can be accessed by the policy owner for any reason.  Dishwasher died (mine did today), Car needs work, need money to invest in an opportunity?  The cash value is available when you need it.  No approval needed like a bank loan.  It is your money and you can use it.

The cash value is guaranteed in a whole life policy.  It is actually listed on a schedule of values inside the contract.  If the schedule lists $10,000 of CV at the end of year 7 that is what it will be.  No need to worry about what the economy has done, or if there was a crash recently.

There are tax benefits to the cash value growth and the death benefit payout of life insurance.

Of course, there are some things you will need to be aware of so your policy stays healthy and is there when you need it.

Participating Whole Life vs. Non-Participating Whole Life

Whole life can be either Participating or Non- Participating.  This is referring to the dividend that is either part of the policy or is not part of the policy.

If a policy is participating that means the company may pay a dividend to the policyholders of this type of contract.  This dividend is based on the financial performance of the carrier for the year.  The longer you have had your policy and the higher the cash value grows the more your dividends will grow as well.  The first few policy years don’t look very impressive, but later in life, the dividends can exceed the premium that you pay!

It is important to know that dividends are not guaranteed the way the base cash value is.  If the company decided not to declare a dividend they do have that right.  This can be either a single down year or multiple years if they so choose.

These dividends can be paid out in several ways.  Not every company offers every option but here are the most common.

  • Paid as Cash, the policy owner would get a check for the amount of the annual dividend.
  • Leave the Dividend with the company and earn interest set by the company.
  • Reduce Policy Premium, offset the amount of premium due out of pocket.
  • Purchase Paid-Up Additional Insurance, The dividends are used to purchase miniature new policies that are “paid up”.  This causes the policy face amount to grow by that amount, this mini policy has a cash value and dividend earning potential of its own.    This is a little difficult to visualize, think of them as little single premium policies that are housed inside the original policy. Stacking these together year after year can really accelerate the performance of a WL policy.
  • Repay Oustanding Policy Loans, if you have a loan out from the CV this option can reduce the loan or even pay it off completely.

A  non-participating policy still has a cash value and it still grows over time.  It is based on that schedule listed in the policy and as long as you don’t take the cash out will just follow that schedule.  It really has no way to grow any faster.

Limited Pay Whole Life

Whole life offers an opportunity to pay up your policy.  You can pay an additional premium in the early years for the purpose of discontinuing payments all together later on.  There are several options for limited pay policies but the most popular is probably 10 and 20-year paid up options.  Plans can be set up from the start to have a level premium and a guarantee that once you make that final payment your coverage stays intact and your premiums stop.

This is not the same as the old vanishing premium concept where if the dividend was higher than the premium you could apply the dividend as premium and stop making payments.  Since dividends are not guaranteed you can not count on that strategy.

Single Premium Whole Life

The most aggressive form of limited pay policy is a single premium life.  You can pay one lump sum payment and have a paid-up policy with no premium due going forward.

There is one major downside to a policy like this.  The potential for a taxable event if you ever cash the policy out.  Because WL has a tax-favorable treatment to the cash value there are limitations as to how aggressively you can fund permanent life insurance.  This limitation is known as the MEC or Modified Endowment Contract rule.  Calculated by the 7-pay test it is the maximum amount of premium that you can contribute to a life insurance policy without violating the MEC rule.

Violating the MEC rule removes the tax-favored status of the cash value should you ever decide to cash out your policy.  This puts it on par with other tax-deferred vehicles, the tax can be deferred until withdrawal.  You wouldn’t be taxed from year to year like other investment options.

Who are single premium policies good for?

Single premium life is great for someone that wants a set it and forget it policy.  You make your lump sum payment and you are done.  No more payments, no worries about your coverage ending.  It is done.

Also a great tool for passing money on to the family.  I can’t tell you how many clients I have worked with that late in life are comfortable and want for nothing on a modest income and their needs are taken care of.  Too many of these clients have money sitting in CD’s because they are “safe” and “guaranteed”.  This money is earmarked for the kids or grandkids and they have no desire to use it for their own use.  $100k in a CD earning 1% might be safe but it sure isn’t growing…  That same $100k could be $200k or more in a single premium life insurance policy.  Not only that but it passes outside of probate and income tax-free to the beneficiaries.  Policies are backed by the carrier keeping it safe and it has a cash value so if the need did arise your money is still available.

Final Expense Whole Life

Probably the most widely sold whole life is final expense or burial life insurance.

FE is available for people 40-85 in most states.

Many carriers limit the coverage to $40k with a couple that offers $50k.

Most final expense whole life is non-participating so the amount you buy is the amount you will have for the long run.

Final expense underwriting is typically much less invasive than the traditional whole life.  Often times an in-depth phone interview and a prescription check are all that is required and approval can be as little as a few minutes to a few days.

The amount of risk the companies are willing to take is increased and that is reflected in the cost for a final expense policy.  The cost per unit is higher for one of these FE plans than other policies.

Guaranteed Issue Whole Life

GIWL is a type of final expense that literally accepts everyone.  You can not be turned down for one of these policies for health reasons.  It is a great fall back for someone that has had major health setbacks and wouldn’t otherwise qualify for life insurance.

The policy is offered on a “graded” benefit.  In the first 2 years, the beneficiary would not get the full benefit.  But that doesn’t sound like a good deal?  What if I die before the 2 years?  Inside of 2 years, the company pays all premiums + interest as the death benefit.  Carriers are paying a range from 10%-30% on the premium.  You sure won’t find a bank that pays that much.  Finally, after the end of year 2, the full policy amount is paid to the beneficiary.

These are certainly the last resort but are a good option where there is nowhere else to turn.  You might be surprised by the conditions that are eligible for day 1 coverage after we evaluate your history.


Direct Recognition vs. Non-Direct Recognition

As if dividends were not complicated enough to understand there are 2 ways that the companies view the dividends and the cash value when there is a loan against the policy.  This is referred to as direct recognition and it can be a very powerful concept to be aware of when looking into a whole life policy.  This is the basis of how the company treats the value of a policy when there is a loan outstanding from the cash value.

This basically boils down to if the loan affects the crediting of dividends or not.

Why does this matter and what does it mean?

The loan on a wl policy is given by the company and is not actually the cash from your policy.  The cash value is simply the collateral the company holds in the event you don’t pay back the loan.  With this in mind, the company actually credits the dividend rate on the money that you have loaned out.  Can you imagine your local bank giving you a loan and paying you interest for borrowing the money?  These policies have a fixed loan interest rate, it is possible to earn more interest via dividends than you are actually paying for the loan.

Non-Direct Recognition is the original way that policy loans and dividends were handled.  Under this method, the dividends are not affected by an outstanding loan.  This was the original basis for many popular programs such as Bank on Yourself, Infinite Banking, and LEAP Life Economic Acceleration Process.  These are all methods that agents can use to help visualize the benefits of complete utilization of whole life insurance.  It takes a deep understanding of policy design and strict discipline to operate a policy this way.

Direct Recognition Carriers

  • Ameritas
  • Penn Mutual
  • SBLI
  • Northwest Mutual
  • Minnesota Life
  • Guardian
  • Thrivent
  • Mass Mutual*

Direct Recognition companies typically use a variable rate loan structure to help combat the possibility that you are paying less than market rates on money that is loaned out and earn the full dividend rate.  This sounds like a negative to the policyholder at first glance, but in reality it allows the company to be more generous with the dividend rate as a whole and the direct recognition companies have consistently achieved higher internal rates of return since they were introduced.

Non-Direct Recognition Carriers

  • Ohio National
  • Lafayette Life
  • Met Life*
  • New York Life
  • Foresters
  • Mass Mutual**

*Met Life is no longer operating under the Met Life name.  They have re-branded to Brighthouse Financial.  They no longer offer this policy for new sales but is available for conversion from a Met Life term policy.

**Mass Mutual is on both lists as they offer both types of policy structure.

What is the Difference Between Term and Whole Life?

In our Ultimate Guide to Term Life Insurance, we take a deep dive into term life and how it works.  We look at the pros and cons just as we have with WL here.  Take a look if you have any questions in this section.

On a basic, level term life policy is just pure insurance it does not have the cash value or growth component that whole life has.  It is just the best bang for your buck death benefit protection that you can get for the money.

Term life also lacks the lifetime coverage that whole life insurance provides.  A term policy covers a fixed period of time.  If you outlive that period of time the policy expires and you have no coverage.  Some times that is no big deal?  Maybe your need has passed?  Perhaps you have paid off your house?  Or retired?  You don’t need such a large policy any longer?  Great your policy was there if you needed it and you were one of the 99% that made it through.  Isn’t that the better place to be anyway?

Whole life insurance, on the other hand, is permanent, but it comes at a cost.  A significant cost actually.  For a 35-year-old healthy female, a 30-year term policy for $1M would cost only $770 per year.  That same woman would have to pay $10,750 per year for a whole life insurance policy!!!  Guess there is a reason for the term vs whole life Suze Orman debate?

In reality, most people would not need a permanent policy for such a large amount.  That client might want to choose a more realistic wl policy and term for the difference.  Something like a $100k whole life for $1100 per year with a $900k term policy costing just $425 for 20 years.  She would have the same $1 million coverage for the majority of the working years and til the kids finish college.  Then still have the benefit of $100k in whole life coverage and 20 years of cash value built up.  With dividends, it is possible that policy is worth much more by then.

Is Whole Life Insurance Worth it?

This will really depend on what your goals and needs are.  Everyone has an opinion the vast majority decide that it is not worth the cost when they are young and trying to get things going.  As a father of 4 and married 18 years as I am writing this, we have had our ups and downs for sure.  I can tell you a whole life insurance policy was not at the top of my priority list.

More people are interested in WL than what we hear about.  We talk to dozens of clients per week that are shopping for life insurance late in life because they didn’t know about WL sooner.  Not because it was too expensive, not because they don’t like how it works, but just because they never had anyone explain it to them.

Imagine the woman from our example.  If she goes with the term only policy and has $1 million of life insurance till she is 65.  She lets the policy end as she is going to retire at 66 and just won’t need that kind of face amount, and she has 1x her salary through work so everything is working out just right for her.

She turns in her retirement paperwork to find out that she can not take that policy with her unless she converts it to a whole life policy?  Why had no one ever shared that with her?  On top of that, the coverage will drop in half at age 70, and the premium is going to be hundreds of dollars a month.  What is she going to do?  She doesn’t want to go without life insurance completely.  She decides to shop around and finds a non-participating final expense plan $25k is the same $1100 per year she could have had $100k for!  Ouch.

It is not just the significant drop in coverage that stings, what about the 30 years of cash value build up she could have in that policy?  It might be worth $200k after 30 years and the dividends would still be growing more every year.  Not only does that final expense policy lack a dividend, but it also will never grow a significant cash value starting that late in life.  Final expense policies do have a cash value component but it is not nearly as strong as a traditional whole life contract.

When you keep things in perspective I think whole life can be worth it, but it is not for everyone.

100% of the time you should get the amount of insurance that is appropriate over a longer term.  If you need $1M but can only afford a 20 year, get that!  Your family is better off with 20-year protection than with none because you really wanted 30 years or whole life insurance.

Pros and Cons to Whole Life Insurance

To summarize for the right person there can be some attractive features in a whole life policy.


  • Whole life insurance comes with strong guarantees.  More than any other type of life insurance.
  • The cash value of a whole life policy grows tax-deferred and if used correctly can be accessed tax-free.
  • Access to the cash value in a permanent life policy is considered a living benefit to life insurance.  You can use it while you are still living.
  • Some policies offer dividends to enhance the value or reduce the cost.
  • Fixed Premiums cannot increase with age or health changes.
  • Nonforfeiture options built in.

If you are more aggressive and hands-on with your savings it may not be right for you.


  • The premium for any given face amount is generally higher.
  • Whole life is more complicated than a basic term policy
  • Cash value build-up is slow and steady and may not be as aggressive as many people would like.  Slow and steady wins the race here.


Having looked at the pros and cons of whole life insurance it is clear that there is a price to pay for permanent insurance.  What do you do if you have a longer-term need but you can’t or don’t want to pay the high cost of whole life insurance?  There is actually another type of permanent insurance that offers some of the guarantees of whole life with much lower premiums.

A Guaranteed Universal Life policy offers you the lifetime coverage guarantee like whole life without that astronomical cost.

How can this be?  What is the catch?

The guarantee that GUL doesn’t offer is the cash value growth.  In fact, they are almost guaranteed to not ever have a significant cash value.

If you have a lifetime need but no need for access to a savings component a GUL might be the right fit for you.

Back to our example from before.  Our 35 woman was faced with a $15k+ premium to go with WL, she could get a GUL for only $4500 per year.  She could take that savings and put it where ever she sees fit.  If desired can be aggressive and adjust for all the stages of life.  Keep in mind that savings is not guaranteed like a whole life but it is more flexible.

Call us today with all your questions.  A quick call can sort through your options and get you covered by peace of mind today.