How Does Whole Life Insurance Work?

Whole life insurance policy gives lifetime protection to the policyholder.

Life insurance policies are important to secure financial strategies, these policies are designed to accumulate a lump sum amount by the end of the policy to give to the beneficiaries. A whole life insurance policy is a good option for people looking to create a financial legacy.

A whole life insurance policy is an insurance policy that provides lifetime protection to the insured. This type of policy has two components: a death benefit and an accumulated cash value.

Let’s get into details.

What is Whole Life Insurance and how does it work?

Just like the name suggests, the policyholder is insured for their whole life. Which means the person can borrow the insurance money during their lifetime for an unexpected expense. This is a good option because your money is saved over the years and you can ask for it even during your life.

This cash accumulated over the years gives you an opportunity to borrow your ‘savings’ at any point in life whether it is for medical bills or your child’s tuition.

Moreover, there is a guaranteed death benefit as well. In case the person dies during the whole life insurance time period, all of the money will be transferred to their beneficiaries. This obviously comes with a very logical condition that all premiums must be paid promptly and regularly during the time of the policy.

Whole life insurance is designed to provide for you to use that accumulated cash value in your life. Because if you die, your beneficiaries will receive the death payout, not the cash value.

Now that we have the definition out of the way, let’s dive into details to get a better overview of what is in store!

How does Whole Life Insurance work?

The most common question that you may have thought about a lot must be this. How does it work? Is it easy to do, or is the process complicated?

To answer your question in all honesty, the process of whole life insurance is a little complicated as compared to other life insurance options, however, it is very much doable once you’re in it.

Whole life insurance policies have the potential to grow with time for added benefit; the process may seem slow at first but it surely picks up speed after a couple of years.


This is based on the assumption of your earnings growing at a certain rate with each passing year, so much that it exceeds the cost of insuring you. Sometimes you’re even able to pay all your lifetime premiums in one go!

Upon choosing a suitable whole life insurance plan, it will derive a premium amount that you will either have to pay each month or annually. It is usually a nominal amount, but more expensive than other insurance options because this policy offers lifetime coverage.

Whole Life Insurance Cash Value

Cash value is actually a very important savings component of your whole life insurance policy. All of your insurance premium is calculated and a certain percentage is added as a tax-deferred amount to the cash value which you can utilize during your time.

And with time, the cash value increases!

How long does it take for Whole Life Insurance to build cash value?

Many experts say that you should wait at least 10-15 years before getting your hands on the cash value. This is enough time for you to have a huge chunk to use in your life to pay off hefty expenses.

There are a few details on whole life insurance that are too important to be missed, such thin lines are easy to be overlooked but make sure you have all the information so that you don’t make mistakes.

Is Whole Life Insurance taxable?

The plus point of this is that you can withdraw all of your money WITHOUT paying any tax, however, in such a case that you surrender the policy, all of the money you have withdrawn previously which is the cash value from premiums, all of that money will be charged against income tax.

How does Term Life Insurance work?

The process is standard and simple- when you’re done selecting a good insurance company based on your needs, you will go through a simple documentation process. Your name, credentials, demographics and other basic information will be recorded. After that, the insurance company will decide which policy suits you best and how much premium you have to pay based on your health and other information you provided.

They might also ask extensively about your health, if you have smoking habits or some permanent ailment, what your daily routine is like, what your hobbies are etc. In some cases they might also want you to take a medical exam for more satisfactory results and to better determine which policy will be most beneficial for you.

An example

Let me give you an example with numbers to make it easier for you to understand.

Kevin is 40 years old and wants to buy a suitable plan for his family that would protect their financial needs in the unfortunate situation that he dies. He goes to the best insurance company and opts for a term life insurance plan.

He buys a 10 year program of $500,000 with a premium fee of $50. In case he dies during the said 10 years, his beneficiaries will receive all of the money. If he is able to outlive this period, no one will get anything.

Instead, he will have to renew his policy if he wishes to receive benefits. But this time when he renews the policy, the premium will be higher because now he is 50 years old instead of when he was 40 during the first time around.

Kevin made a good decision keeping the security of his future in mind- he had to look after his family on the off chance that he is no longer able to be there for them. A term life insurance has a guaranteed death payout which looks after your family under unfortunate circumstances.

Whole Life Insurance Pros and Cons

With all this information, you must be thinking: Is whole life insurance worth it? What are the disadvantages of whole life insurance? Is it better if i apply for it now?

I have made a quick list of pros and cons which will answer your questions more effectively, pros will tell you why whole life insurance is a good investment and cons will shed light on why whole life insurance is a bad investment.

Pros of Whole Life Insurance

  • Guaranteed death payout
  • For lifetime; can withdraw and use amount during your life
  • Constant premium cost throughout the policy
  • Works as an asset (cash value)
  • Tax-free death benefit
  • Tax-deferred cash value

Cons of Whole Life Insurance

  • More expensive premiums
  • Complicated process

As per this basic list of pros and cons, it is obviously that the benefits of whole life insurance are more. But still, the question of it being really worth it depends upon your goal. What do you aim to gain by the end of your life; is it managing expenses while you’re alive or is it focusing on your family’s future after you’re gone?

Simply self evaluating these questions will give you answers which will point you to the right direction of the policy you need.

Whole Life Insurance Example

Miranda is a non-smoker 30 year old woman who purchases a term life policy of 20 years. The death benefit is decided on $1 million for $480 per year. Let’s assume she dies at age 53 after paying premiums for 23 years. Her beneficiaries will receive a tax-free amount of $1 million even though Miranda only paid $11,040 during her life.

This is an excellent return on investment that term life insurance provides if your beneficiaries claim the policy.

What if Miranda had opted for a whole life insurance instead?

Instead of $480 a year, she would have been expected to pay $9,370 a year because of higher premiums!

After 5 years, the guaranteed cash value of the policy is $19,880 while she would have paid $46,850 in premiums.

After 20 years, the cash value accounts to $181,630 and premiums would be $187,400.

But, if she had again bought term life insurance after 20 years for $480 a year and invested the remaining $8,890 at an annual average return of 8%, she would have secured a complete $480,806 before taxes!

So there is guaranteed return on whole life insurance, that’s for sure.

There is another option though. What if Miranda had put the remaining $8,890 in a savings account with an interest of 1% even? She would have had $208,671 after 20 years which is a lot more than what the policy originally guaranteed at $181,630.

So if you really come to think of it keeping all the math in mind, do you think buying whole life insurance is a good idea? Yes, the average return is guaranteed, but wouldn’t someone be better off investing that money or putting it in a savings account?

Whole Life Insurance Companies

Just when you know what whole life insurance is, you must be looking for the best whole life insurance companies that have suitable plans for you and your family.

Taking advantage of this opportunity, i have crafted a list of the companies that not only give you affordable whole life insurance plans but are also great at what they do.

  1. Northwestern Mutual Whole Life Insurance
  2. Mutual of Omaha Whole Life Insurance
  3. AARP Whole Life Insurance
  4. New york Life Whole Life Insurance
  5. MetLife Whole Life Insurance
  6. USAA Whole Life Insurance
  7. John Hancock
  8. Globe Whole Life Insurance
  9. Colonial Penn Whole Life Insurance
  10. State Farm Whole Life Insurance

This is a list of companies that you can refer to with your needs so that not only they are able to suggest cheap whole life insurance plans but can also be the answer to all your queries.


Insurance in such changing times have become a necessity for some households, just the idea of being insured for lifetime is appealing to some people. It is great to have some money saved up to either be used during your life or be used as guaranteed death benefit, however, there are two sides of the coin to this as well.

Make sure your insurance company transparently lays out all benefits and risks of insurance policies after thoroughly understanding your insurance needs. When you’ve successfully chosen a plan, make sure you regularly pay your premiums to continue with the policy!

John Otero

John Otero

John Otero is an industry practitioner with more than 15 years of experience in the insurance industry. He has held various senior management roles both in the insurance companies and insurance brokers during this span of time. He began his insurance career in 2004 as an office assistant at an agency in her hometown of Duluth, MN. He got licensed as a producer while working at that agency and progressed to serve as an office manager. Working in the agency is how he fell in love with the industry. He saw firsthand the good that insurance consumers experienced by having the proper protection. John has diverse experience in corporate & consumer insurance services, across a range of vocations. His specialties include Major Corporate risk management and insurance programs, and Financial Lines He has been instrumental in making his firm as one of the leading organizations in the country in generating sustainable rapid growth of the company while maintaining service excellence to clients.

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