Whole life insurance can play a valuable role in helping families protect their assets and interests. Such coverage provides:
- A guaranteed death benefit.
- Cash value accumulation to help build wealth.
- Access to cash value during the policyowner’s lifetime.
- A death benefit that is generally paid out income tax-free1
Indeed, the versatility of whole life insurance as a financial planning tool is hard to deny. But whole life policies can differ significantly depending on the coverage provided.
Some prioritize cash value growth, while others may offer higher dividends, different payment structures, or riders that allow policyowners to customize their coverage.
Premium costs can also vary widely based on whether the policy requires medical underwriting and the financial strength of the underlying company — a critical component that should not be ignored.
“Life insurance only works if the company is still financially healthy decades from now,” said Abbe F. Large, managing director of Lenox Advisors in New York City, noting consumers should prioritize companies with a track record of dependability. “Independent financial strength ratings give families confidence that the insurer can pay claims, remain stable during market downturns, and honor the long-term promises built into the life insurance contracts.”
As such, families shopping for whole life insurance should be sure they understand the coverage options available and how such policies might help them reach their financial goals. But first, a primer.
What Is Whole Life Insurance?
Whole life insurance is a type of permanent life insurance, which provides a guaranteed death benefit to the beneficiaries (often the children and spouse) when the policyowner passes away, provided the premium payments are up to date.
Permanent life insurance policies also accumulate cash value over time, which grows tax-deferred and can be accessed during the policyowner’s lifetime through policy loans or partial withdrawals.1
By contrast, term life insurance pays a death benefit only if the policyowner dies during the coverage term — typically 10-, 20-, or 30-years. Term life policies do not accumulate cash value.
Other types of permanent life insurance include:
- Universal life, which allows for greater premium flexibility. A policyowner may adjust the amount they pay in premiums each year — or even month to month — as long as there is enough cash value to cover the cost of insurance and administrative charges of the policy.
- Variable life insurance, which let’s you make your own investment choices within your policy. A variable life policy provides access to a number of different investment subaccounts, so you can choose options that align with your goals and tolerance for market and investment risk. (Learn more: What is variable universal life insurance?)
Survivorship Life Insurance
Families that are focused primarily on estate planning goals and leaving a financial legacy behind might also consider a specific type of permanent life insurance called survivorship life insurance.
Such coverage, sometimes called “second-to-die” life insurance, pays a death benefit only after the second spouse passes away. As such, it can potentially be more affordable than traditional permanent life insurance.
In many cases, survivorship life insurance is used to pay estate taxes, preserve family wealth, or provide for a special needs child after both spouses have passed away.
Financial strength
Families that are considering whole life insurance protection should look first to the underlying financial strength of the issuing insurance companies.
- Check their ratings from independent agencies A.M. Best, Fitch Ratings, Moody’s, and Standard & Poor's for overall stability. (See: Understanding financial strength ratings)
- Research their customer satisfaction record using sites like J.D. Power and customer complaints through the National Association of Insurance Commissioners.
- Learn about their corporate structure. Some life insurance companies are publicly held by shareholders, while others are mutual companies that are owned by their policyowners, or customers. This affects their business and investment objectives.
For example, mutual life insurers, like MassMutual, focus for the most part on providing long term value to policyowners while maintaining a high level of financial strength to meet future financial obligations to policyowners.
Publicly traded life insurers, on the other hand, tend to seek investments and performance that will support their stock price. And they may have more flexibility in raising capital.
Cash Value Growth
Whole life policies that allow for faster cash value growth may be a better fit for families that prioritize future financial flexibility.
Cash value, which grows tax-deferred, can be accessed during the insured’s lifetime through a loan or partial surrender. And the funds can used for any purpose including medical expenses, college tuition, or supplementing retirement savings.
Be aware, however, that access to cash values will reduce the policy’s cash value and death benefit, increase the chance the policy will lapse, and may result in a tax liability if the policy terminates before the death of the insured.
Any cash value that does not get used can continue to grow and may increase the total death benefit that gets passed to the beneficiaries.
“For families that value the flexibility to borrow against their policy on a tax-favored basis, the efficiency of cash value growth is essential,” said Brian Kaplan, managing director of Lenox Advisors in New York, New York. “That growth within your policy can potentially create a versatile ‘opportunity fund’ for life’s milestones, providing liquidity that allows you to access capital for business expenses, education costs, or emergencies without exposure to market volatility.”
By choosing a company that prioritizes long-term growth and policyowner access, he said, you can help ensure that your life insurance coverage can potentially serve as a powerful financial tool during your lifetime and after you are gone.
Dividend History
All whole life insurance policies offer a guaranteed minimum cash value growth rate, but participating policies (typically sold through mutual insurers) may also allow policyowners to share in company profits through dividends, which are based on the insurer’s performance and are not guaranteed.
Some companies have a longer history of paying dividends than others. MassMutual, for instance, has paid out dividends every year since 1869.
Dividends can be taken as cash, used to pay premiums, or reinvested to potentially build cash value faster.
“Dividend history matters, not because the rate itself predicts future performance, but because it reflects the carrier’s long-term financial strength, discipline, and reliability,” said Large. “Families should absolutely consider it, especially with mutual companies, but they shouldn’t choose a policy based on dividend rates alone. The carrier’s overall financial strength and the quality of the policies’ design play a much bigger role in the long-term outcomes.”
Family-focused Riders
Some whole life insurance policies also offer riders that may bring families peace of mind.
Riders, which typically require an additional premium payment, are add-on benefits to an existing policy that enable policyowners to customize coverage based on their unique financial needs.
Examples include:
- Waiver of premium (if disabled) — allows for the premiums on a life insurance policy (including those associated with certain riders on the policy) to be waived if the insured becomes totally disabled, as described in the rider. Cash value growth and any dividends payable will continue as if the policy owner were still paying.
- Child term rider — can potentially be added to a parent’s whole life policy to provide term life coverage for children until age 18 to 25. Such riders may also allow the child to convert to a permanent policy down the road without the need for medical underwriting, which may help preserve future insurability.
- Spouse rider — may allow policyowners to add coverage for their spouse while the primary policy remains in force, which may be cheaper than purchasing two standalone policies.
- Life insurance supplement rider — provides a mix of whole life insurance and term life insurance that is paid for by rider premiums and policy dividends. Such riders may be appropriate for budget-conscious policyowners seeking a lower-premium alternative when permanent coverage is desired but the cost of an all-whole-life policy is prohibitive.
- Guaranteed insurability riders — Also called guaranteed purchase riders, these riders give policyowners the option to purchase a specified amount of additional life insurance coverage at certain times in the future. Parents and grandparents buying “starter” policies for their children and grandchildren typically add this rider to give their children the chance to increase their coverage if and when they start families of their own.
Coverage Amount
Lastly, when purchasing whole life insurance, families should be sure they are purchasing enough coverage to protect their families.
This calculator is a good starting point for determining how much life insurance you may need.
Many policyowners purchase life insurance with the goal of replacing a portion of their income if they were to die unexpectedly, with a big enough death benefit that their spouse and children would be able to maintain their lifestyle. But many also make the mistake of selecting a death benefit based on their current income without factoring in their future earnings potential.
Others select a death benefit amount that would help their loved ones pay off debt, including their home mortgage, student loans, or future college costs for their children.
In some cases, younger families with a limited budget choose to purchase term life insurance to secure a bigger death benefit for less when they are just starting out, and later convert to permanent life insurance as their income and financial goals evolve.
If that’s your goal, just make sure that your term life policy allows for future conversions without a medical exam. Access to permanent life insurance might otherwise be harder to obtain if you develop a chronic health condition as you age.
Conclusion
Whole life insurance can play a pivotal role in helping families secure their financial future and protect the ones they love. But individual policies can differ substantially based on how quickly they accumulate cash value, whether they offer the opportunity to earn dividends, and the financial strength of the issuing insurance company.
A financial professional can be instrumental in helping families determine how much and what type of insurance protection their household may need.
“When choosing a policy, families should look for a partnership with an advisor who can provide clarity on where they are today and where they want to go,” said Kaplan. “Financial professionals can help you focus on building a strategy that isn’t just a contract, but a living financial foundation designed to evolve with your family’s dreams. You want a policy backed by a company that views you as a permanent partner, not just a policy number.”
1Access to cash values through borrowing or partial surrenders will reduce the policy’s cash value and death benefit, increase the chance the policy will lapse, and may result in a tax liability if the policy terminates before the death of the insured.
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