Find out how permanent whole life insurance works

Heard the term ‘whole life insurance’ but not sure what it means? In this article we explain how it works.

One of the easier insurance forms to remember, permanent whole life insurance is a life-long policy. Whole life policies come with a level premium – much like some term-based insurance formats – that doesn’t change through the duration of the policy, meaning you pay the same premium month after month. 

Another feature of permanent whole life insurance worth noting is that the premiums are slightly higher in exchange for the benefit of a durable, lasting contract with the insurer. They may not be ideal for every potential policy seeker, but they work for many who are interested in leaving a legacy behind for their loved ones regardless of their stage in life. 

Trethowans
Trethowans

But whole life policies are not to be confused with other permanent forms of insurance. Let’s cover some of the major benefits and downsides of whole life insurance. You’ll also see how it compares to universal life insurance.  

Whole life insurance – the pros and cons

First, cash value comes with whole life insurance. Policyholders use this benefit as a financial vehicle for generating savings and collecting worth through both guaranteed and projected values. 

In the guaranteed form, any payments they make to the insurer above the expected premiums build a reserve. They can access this reserve in case of financial need. By comparison, with projected cash value, policyholders access their value based on dividends that work similarly to a stock company. The mutual and insurance company pay their policyholders dividends which can be used as:

  • Cash 
  • Added death benefits
  • Tax-deferred interest
  • Premium offset

The option to save with guaranteed cash value and earn through projected cash value means that having whole life insurance can be a bit like investing and taking partial ownership in the insurance company. The insurer will, in many cases, even refund excess premium payments so that you see a kind of return every year when you’ve more than covered the cost to insure you.

Of course, this all comes at a slightly higher price than you might pay for a term-based policy of 10, 20, or 30 years. A reservation that potential policyholders and applicants have is the relatively higher cost of premiums for a whole life insurance policy. While it comes with many more features—since term policies only have death benefits—you will pay more for excess premium payments and savings vehicles.

But permanent whole life insurance usually costs more just in virtue of the fact that it is guaranteed to pay death benefits while it stays active. The contract is lasting. The insurance company and the policyholder (or insured) make a commitment to keep the premium level and to pay when it is time to pay.

Whole life versus universal life insurance

Some talk about universal life insurance and whole life insurance interchangeably when they refer to “permanent” insurance. While both last forever (or for the entire duration of your life after you sign the contract), there are many different variations on the two that make them distinct, especially in their flexibility and cost. 

Costs compared

As we discussed, whole life insurance comes with a level premium that never changes along the course of the life insurance policy. This is not the case with universal life insurance since it uses what’s called minimum cost. This can be structured differently, but it either comes out of the owner’s own funds or from the benefits they accrue with cash value. 

But, minimum cost doesn’t stay the same each year because the likelihood of mortality changes with your age. That means there is an annual increase in premium expectations that force many policyholders to invest as much as they can into cash value to stay ahead of spikes in the cost of their insurance. Once they invest enough, they can potentially beat the rising premiums and generate worth. 

Optional variations 

Whole life is somewhat fixed with its structure. Unlike that, universal life insurance allows for considerable variation to meet the needs of the insured with as many custom benefits as they may take an interest in. Here are some of the other forms universal life insurance can take:

  • Guaranteed
  • Traditional
  • Variable
  • Index

Speaking to an expert is the best way to see what kind of life insurance policy might most benefit you. But, you can also start to explore your options with Sproutt.

Find permanent whole life insurance through brokers like Sproutt

If you’re looking for a permanent solution and benefit for your loved ones through life insurance, you can find quotes and plans through Sproutt. Online brokers like Sproutt use market insight and advanced, easy-to-use tools that generate the best quotes for the highest benefit amounts.