What is Whole Life Insurance?
- Daniel Kurt
- Oct 10, 2025
- 5 min read
Updated: 8 hours ago
Main takeaways
Whole life insurance provides lifelong coverage and builds cash value you can access during your lifetime, unlike term policies.
Whole life premiums are considerably higher than comparable term coverage.
While cash value offers flexibility, using it reduces the death benefit your beneficiaries receive.
For many families, a term policy plus investing the savings may provide better long-term value than whole life insurance.
If you’re becoming a parent or taking on financial responsibility for an older family member, you may be thinking seriously about life insurance for the first time. As you quickly realize, though, it’s not just a matter of whether to buy a policy, but what kind of coverage to get.
The fact is, term and whole life insurance are vastly different products that serve different needs. Understanding what you’re getting—and how much you’re paying—with a whole life policy can help ensure that you make the right choice for your family.
Whole life insurance: The basics
As with term life insurance, whole life policies provide a death benefit for your heirs when you pass away. That makes it an important financial safety net for the ones you love. As long as you have a large enough policy, you have the security of knowing that they can maintain their current lifestyle, no matter what may happen to you.
But whole life insurance policies have an additional feature that sets them apart from term policies: cash value. Essentially, this is the portion of your death benefit that you can access during your own lifetime. You can tap those funds to help buy a home, send a child to college or manage any other financial needs that may arise. If your balance is sufficient, you can also use it to pay your premiums for a certain period of time.
When you pay the premium every month or every year, part of it covers the cost of the insurer providing your beneficiaries with the death benefit. But another portion credits the cash balance of your policy. Therefore, your cash gradually grows in value over time.
In addition to the contributions from your own payment, the insurance company pays interest into your cash balance based on prevailing market rates—though some policies provide a minimum guaranteed rate of return.
Coverage for life
The other key feature that differentiates whole life from term coverage is the duration of the policy. Term policies only pay out a death benefit if you, the insured, pass away during the “term.” That may be, say, 10, 20 or 30 years, depending on the policy you select.
Once your term expires, you would have to reapply for a new policy in order to continue coverage. At that point, your rates are likely to go up because you’re older than when you purchased your original policy.
You may also have to go through medical underwriting to get a new policy. Should you have any medical issues, your premium amount may increase even more—or you could be denied coverage altogether.
As the name suggests, whole life policies provide guaranteed coverage for life, and typically with a level premium that won’t increase as you age. No matter what health issues you acquire later in life, you can rest assured that your coverage won’t lapse — as long as you make the required payments.
Because they offer lifelong protection and cash value, whole life policies are considerably more expensive than non-permanent policies. Typically, you’ll end up paying more than 10 times more per month for a whole life coverage versus a term policy with the same death benefit.
Feature | Term | Whole Life |
Coverage period | In force only during the policy term (e.g. 10, 20, or 30 years) | In force for as long as you pay the required premiums |
Cash value | No | Yes |
Death benefit | Full amount is guaranteed. | Amount may be reduced by loans or withdrawals from cash value. |
Cost | Most affordable type of life insurance | Initial costs is usually several times more expensive than term policies. |
Tapping your cash value
Because of the cash value component, whole life policies are something of a Swiss Army knife for financial needs. When you’ve accumulated enough funds in your policy, you can access that money through:
Making a withdrawal
Taking out a policy loan
Using your cash value to pay premiums
Surrendering your policy for cash (minus any fees)
The tax code is generally friendly to cash value withdrawals, which is one of the advantages of a whole life policy. As long as you withdraw an amount less than the total value of the premiums you’ve paid, the IRS considers it a non-taxable “return of premiums.” Should you pull out an amount greater than your “basis” — that is, money from interest or investment gains — that portion may be subject to income tax.
The favorable tax treatment aside, it’s important to be aware of the trade-off any time you pull money from your policy. When you make a withdrawal from your cash value, or take out a loan that you don’t repay, you’re reducing the death benefit that your heirs will receive when you pass on.
If, on the other hand, you buy a lower-cost term policy and invest the amount you save on premiums, you’re not sacrificing one or the other. You’re keeping your full death benefit intact — albeit only for the duration of the term — while building assets in a brokerage or retirement account. And depending on the investments you choose, you may benefit from a greater potential growth than the relatively conservative interest rate you’ll see in a whole life policy.
What are the advantages of whole life insurance?
Whole life insurance policies
Guaranteed coverage for life, as long as you pay required premiums
Policies offer cash value that you can tap during your own lifetime for any number of financial needs
Depending on your policy, there may be a time when you’re fully “paid up,” allowing you to maintain coverage with no additional premium payments
Cash value grows tax-deferred; your balance grows faster because it’s not being reduced by taxes every year
Some policies pay dividends that you can receive in cash or use to buy additional coverage
Are there disadvantages to whole life coverage?
While whole life insurance policies offer greater financial flexibility than term insurance, they also have some drawbacks. For instance:
The initial premium costs are usually several times higher than term policies with the death benefit
Whole life policies are much more complex than those without cash value
You could face surrender charges if your policy lapses within the first few years of owning it
Most policies pay relatively low interest rates, providing lower growth potential than other investment options
The upshot
There’s an old saying that whole life policies aren’t bought, they’re sold. It’s important to keep in mind that the agent selling you on a permanent policy usually makes a lot more in commissions by selling these more expensive products than they would by selling you a term policy.
Does that mean whole life is necessarily a bad choice? No. But your family only needs coverage for a defined period of time, you may find that getting cheaper coverage and investing the difference represents a better deal.
