Whole life is a type of permanent life insurance that lasts your entire life and usually comes with a feature you can use while you’re still living called the cash value, which may grow over time. The cash value account provides advantages like allowing you to borrow against it or using the growth to pay your policy's premiums.
Although whole life insurance policies cost significantly more than term life insurance, they're worth considering if you have complex financial needs. Additionally, whole life insurance is designed to last for the rest of your life, where 99% of term life insurance policies expire before they can be claimed . [1] If you decide whole life insurance is a good fit, here’s how to decide which type of whole life insurance is best for you based on your family and financial needs.
What are the different types of whole life insurance?
A traditional whole life insurance policy is relatively straightforward: You get lifetime coverage that pays a benefit to your loved ones when you die and a cash value that grows at a fixed rate set by your insurer.
Variations on the standard whole life policy might offer different investment options, payment schedules, or be designed for specific circumstances. The different types of whole life insurance include:
Indexed whole life insurance
Variable whole life insurance
Limited payment whole life insurance
Modified whole life insurance
Reduced paid-up whole life insurance
Single-premium whole life insurance
Joint life insurance
Whole life insurance for children
Guaranteed issue whole life insurance
Simplified issue whole life insurance
Whole life insurance basics: Non-participating vs. participating
By having a cash value account with your insurance company you could have a stake in the financial success of the company, which might be reflected in dividends (company profits paid to shareholders). Whether your policy is non-participating or participating determines whether you receive any dividends.
Non-participating whole life insurance Doesn’t pay dividends if your insurer has a profitable year. Non-participating policies often have lower premiums.
Participating whole life insurance Pays dividends based on company performance and are applied to your policy’s premiums or cash value. Dividends are considered a refund on an overpayment, rather than a profit .
Dividends are tax-free, and whether you receive them usually depends on your insurer, not the type of policy you buy. Participating policies may offer additional benefits such as paid-up additions, which is extra whole life coverage that you can purchase with your dividends.
Whole life insurance for investors
Though most people should avoid investing in life insurance, high earners who have maxed out other tax-deferred savings options can use whole life insurance to grow their assets. Different policies offer different investment strategies and levels of flexibility.
Indexed whole life insurance
The cash value of an indexed whole life policy grows at a rate controlled by your insurer. There’s a guaranteed minimum and there may be an upper limit, but other changes are based on the performance of a market index your insurance company chooses (e.g. the S&P 500®).
While the potential for cash value growth is higher, you may pay high management fees on your gains. Unlike indexed universal life insurance (IUL), not all indexed whole life policies allow you to adjust your death benefit or make premium payments with your cash value.
Learn more about the differences between whole life insurance and IUL
Variable whole life insurance
With variable whole life, also called variable life insurance, you decide how to invest your cash value. You choose your investments from a selection of funds offered by your insurer, and your cash value grows or shrinks based on the performance of those funds. Like indexed whole life, gains may come with high fees.
Whole life insurance with flexible payment features
Some whole life insurance companies offer flexibility for paying your premiums. You might have an option to pay your premiums up front, pay over a shorter period, or reduce your coverage and stop paying premiums entirely.
Limited payment whole life insurance
Limited payment plans allow you to pay off your premiums and fund your cash value over a shorter period instead of paying until age 65, 99, or 100. You’ll pay higher premiums for a set number of years, then your policy will be considered paid up. You’ll no longer need to pay to keep your coverage active.
This is sometimes referred to as 10 pay or 20 pay whole life insurance. The numbers reference the number of years you’d be expected to pay premiums; premiums for a 10 pay policy are higher than those for 20 pay whole life.
Modified whole life insurance
Modified whole life insurance comes with a lower premium for the first two to three years of your policy. After that period ends your premiums increase once, often significantly. That lower initial premium means you might be able to afford a higher death benefit right away, rather than buying a lesser amount and trying to increase your coverage later.
If you need whole life coverage and are sure you can afford the higher premiums within a few years, then modified whole life could work for you.
Reduced paid-up whole life insurance
“On average, permanent coverage can be five to 15 times more expensive than a term policy with the same benefit amount,” says Patrick Hanzel, advanced planning specialist and certified financial planner at Policygenius. The high premiums can make a policy difficult to maintain.
If you eventually find your policy unaffordable, you may be able to use your accumulated cash value to purchase a reduced amount of paid-up coverage. You’ll still have some whole life protection, which you can supplement with term life coverage if needed.
Single-premium whole life insurance
If you never want to think about paying for your life insurance (and if you have the means), some insurers allow you to fund your entire whole life insurance policy when you sign up. Some high earners use single-premium whole life for inheritance planning purposes. However, the upfront cost is too high for most budgets, starting at $5,000-10,000 for less than $100,000 of coverage.
Whole life insurance for family financial planning
Some life insurance companies sell whole life insurance tailored to specific policyholders or needs. These policies offer lifetime coverage with some modifications or additional features.
Joint life insurance
Largely sold to couples (though it can cover any two people), joint policies provide whole life coverage to two individuals under one policy. Joint life insurance is either first-to-die, which pays out after one policyholder dies, or second-to-die (also known as survivorship), which pays after both pass away.
Couples should buy separate life insurance policies, but joint coverage can be helpful if one partner would struggle to qualify for a policy on their own.
Life insurance for children
Individual life insurance policies for children are almost always whole life insurance. They’re often marketed as a way to lock in a policy for your child early and to invest for their future.
We don’t typically recommend buying life insurance for children unless your child has a medical condition (or is at risk of developing one) that would make them difficult to insure as an adult. In most cases, your child will find a cheaper policy in adulthood, and you’ll see greater gains if you invest in a 529 plan or similar account.
Guaranteed issue whole life insurance
Guaranteed issue offers coverage for people over age 50 who need a small death benefit to cover their final medical expenses or funeral costs. Unlike traditional whole life insurance, there’s no cash value attached and death benefits max out at around $25,000.
A guaranteed issue policy allows those with more complex health concerns to buy some coverage, as the application requires just a few medical questions and offers near-guaranteed approval.
Simplified whole life insurance
Simplified whole life is similar to guaranteed issue: it provides death benefits up to $40,000 for people over age 45 and doesn’t include a cash value component.
These policies also allow you to avoid a medical exam but you’ll need to answer a health questionnaire. The questionnaire will include questions about whether you have a terminal illness, are currently bedridden, or whether you’re currently in a long-term-care facility. If you answer yes, you may be denied coverage.
Pros & cons of different whole life insurance types
If you’re exploring whole life insurance options, consider the advantages and disadvantages of each type before you apply.
Type | Pros | Cons |
|---|---|---|
Indexed whole life insurance | Relatively low-risk Guaranteed interest | High premiums Potential for gains and flexibility is lower than other cash value policies |
Variable whole life insurance | Potential for more cash value growth You can choose how your cash value is invested | No guaranteed minimum cash value if your investments underperform You take on all of the investment risk, not the insurance company |
Limited payment whole life insurance | Guaranteed level premiums Guaranteed lifetime coverage | Expensive premiums Higher chance of lapsing on payments Limited cash value potential |
Modified whole life insurance | Low initial premium Fixed death benefit | Premiums increase and you’ll pay more over the course of your life Less cash value potential |
Reduced paid-up whole life insurance | Ability to eliminate premium payments Less likely to need to surrender the policy | You could leave your beneficiaries less than you originally intended If you convert to a reduced paid-up policy, you’ll forfeit any rider you had |
Single-premium whole life insurance | Simple, just one payment and you’re set Lots of cash value growth | Large amount of money required up front Greater tax penalty potential |
Joint life insurance | Can be useful for estate planning Ensures business continuity | Can complicate divorce filings Often more expensive than two separate policies |
Whole life insurance for children | Guaranteed insurability Covers burial costs | Low coverage amounts Rarely needed |
Guaranteed issue whole life insurance | Almost 100% of applicants are approved No medical exam required | Significantly more expensive than other types of insurance Lower payouts |
Simplified issue whole life insurance | No medical exam Cheaper than guaranteed issue whole life insurance | Age restrictions (reserved for applicants age 45 and up) Limited coverage (maximum of $50,000 for most insurers) |
Learn more about life insurance riders
What type of whole life insurance should you get?
The right whole life policy for you depends on your family’s needs and your financial situation. If you need whole life insurance to provide for a lifelong dependent, a traditional whole life policy will provide permanent protection without high investment risk.
If you want coverage that will maximize your growth, some policies have more aggressive cash value options. Note that the potential for higher returns can come with a higher risk of losses or a policy lapse.
At Policygenius, we can match you with an independent insurance agent to help you find the right type of life insurance for your financial goals.
