Whole life insurance pays a lump-sum of money to your beneficiary upon your death. It also has a savings component that can assist you in dealing with financial situations, like financing a large expense, or funding your retirement.
These features make it more expensive than term life insurance. Despite the higher cost, whole life insurance may still make sense.
So you may be wondering, how much does whole life insurance cost?
The cost of coverage is determined by a variety of factors. Continue reading to learn about whole life insurance, the factors that influence its cost, and who it is appropriate for.
What is Whole Life Insurance?
Whole life insurance is a type of long-term insurance. It offers lifelong coverage and has a built-in savings component known as the cash value.
You can rest easy knowing that your beneficiary will get the death benefit at the end of your life if you have whole life insurance. It also contributes to the accumulation of a nest egg that can be used in the future.
Every premium payment is split into two parts. One portion is utilized to cover insurance and administrative costs, while the other is directed to the built-in savings account.
The cash value of your policy earns interest at a preset rate established by the life insurance provider. It grows in value, tax-deferred. That is, it will only be taxed when you remove it. This can be helpful if you intend to access the cash value when you are in a reduced tax rate, such as after you retire. When you access the cash value, you will not be taxed on the entire amount. Rather, only the percentage of the cash value that exceeds the policy basis is taxable.
Remember that the death benefit is paid to your beneficiary, whereas the cash value of your whole life insurance policy is available for you to use during your lifetime. Upon your death, the beneficiary typically receives only the death benefit amount. Any unused cash value is returned to the insurer. As a result, you should have a clear plan in place for how you want to use your accrued cash value.
There are several ways in which you can tap into the policy’s cash value. While the exact range of options may vary among insurers, most offer policyholders the following options:
- withdrawing the cash value partially
- withdrawing the cash value fully by surrendering the coverage
- taking out a policy loan against the cash value
- using the cash value to fund a paid-up whole life insurance policy
- using the cash value to increase the death benefit.
When you make a partial withdrawal of the cash value or take out a policy loan, your death benefit is reduced on a dollar-to-dollar basis. That means your beneficiary will receive less money than you originally intended. For example, if you borrow $50,000 against your life insurance policy and do not pay that back, your death benefit gets reduced by $50,000 upon your death.
What are the different types of whole life insurance?
The different types of whole life insurance include:
- Life Pay Whole Life Insurance
This is the standard type of whole life insurance policy and comes with level premiums and death benefit. That means your premiums and death benefit remain the same for the duration of the plan. Your cash value grows at a fixed rate specified by the insurance company.
- Limited Pay Whole Life Insurance
Limited pay whole life insurance provides life insurance protection and cash value accumulation until death, but the premiums are payable for a set number of years, like 10 or 20 years, until a certain age, for example 65. Since the entire cost of coverage is paid over a shorter period, premiums are higher than those of a standard policy. The shorter the payment period, the higher the insurance premium.
- Single-Premium Whole Life Insurance
The single-premium whole life insurance provides lifetime insurance protection and cash value accumulation with a single premium payment. These policies generally cost a lot of money upfront, but the upside is that your policy will have an immediate cash value.
- Graded Premium Whole life Insurance
Graded premium whole life insurance, also known as modified whole life insurance, is similar to regular whole life insurance policy apart from the way in which it is funded. The premiums are lower during the first few policy years and then increase gradually. After a certain period, the premiums level off and do not change.
- Guaranteed Issue Whole Life Insurance
Guaranteed issue whole life insurance is also called final expense or burial insurance. It provides lifetime protection but involves little or no medical underwriting. Because of this, the premiums are typically more expensive than those of a regular whole life insurance plan. Guaranteed issue policies have smaller death benefits — usually not more than $50,000. They also build cash value, but the potential for wealth accumulation is much less compared to a standard policy as the death benefit is so small.
- Participating Whole Life Insurance
Apart from providing lifelong coverage and guaranteed cash value, a participating whole life insurance policy offers the policyholder the opportunity to earn dividends. The policy dividends are paid annually, but are not guaranteed. The insurer issues dividends to its policyholders whenever it does well financially. Generally, mutual life insurance companies sell participating whole life insurance policies.
- Non-Participating Whole Life Insurance
These policies do not pay policy dividends. Other than that, they are the same as non-participating plans. In other words, your premiums and death benefit remain the same throughout and the cash value grows at a fixed rate.
How much does whole life insurance cost?
How much you will pay for whole life insurance coverage depends on a number of factors. These include:
Life insurance premiums become more expensive as you grow older. Obviously, the older you are, the greater the risk of dying.
Underlying health conditions can increase your premiums. If you are obese or have diabetes, expect to pay a higher rate than your healthier counterparts.
Certain diseases tend to run in the family. If one or both of your parents passed away before age 60 due to a hereditary disease, you will likely pay more for life insurance protection.
Because smokers die on average 10 years earlier than non-smokers, they receive higher life insurance rates. If you smoke, you will likely have to cough up (pun intended) two to five times more money for life insurance than non-smokers.
Women live longer than men on average and as such pay lower premiums.
Occupation and hobby
What you do for a living impacts your premium rate, as does your hobbies. If you have a risky job, like a construction worker, brace yourself for higher premiums. A dangerous hobby, like sky diving or bungee jumping, will also push your premiums up.
The cost of insurance is directly related to the amount of coverage you buy. A $1 million whole life insurance policy will cost more than a $500,000 policy, all other things being equal.
Life insurance riders
Most life insurance carriers give policyholders the option to customize the coverage by adding various provisions or features — called life insurance riders — to the base policy for an additional cost. The more riders you add, the higher the total cost of insurance.
Whole Life Insurance lifetime monthly premiums for $100,000 worth of coverage
Whole Life Insurance Pay for 15 years monthly premiums for $50,000 worth of coverage
How is Whole Life Insurance Different from Term Life?
Both whole life and term life insurance provide financial assistance to your family in the event of your death, but they are vastly different financial products. Here are the main differences between the two:
- Whole life insurance provides lifetime protection. In contrast, term life insurance offers life insurance protection for a certain number of years, for example 10, 20, or 30 years, or until a specific age.
- Whole life insurance accumulates cash value while term life does not.
- Whole life insurance policies may earn dividends. Term life plans, on the other hand, never issue dividends.
Should You Purchase Whole Life or Term Life Insurance?
Your personal situation will determine whether you should purchase whole life or term life insurance. Term life insurance is appropriate if you only need coverage for a limited time, such as until you pay off your mortgage, achieve financial independence, or send your children to college. It is a better alternative if you are on a tight budget while purchasing life insurance.
Whole life insurance, on the other hand, may be suitable for someone who has a lifelong dependent, wishes to leave an inheritance or donate money to charity upon death, or intends to utilize life insurance as an estate planning tool. It is also an excellent option for older persons who want a life insurance coverage primarily to cover their final expenses. Individuals with a high net worth who have exhausted all traditional investment options may profit from whole life insurance coverage.
Why is Whole Life Insurance So Expensive?
Whole life insurance costs 10 to 15 times more than term life insurance on average. That is because it offers two important benefits missing from term life: lifelong coverage and cash value.
Whole life insurance policies have no expiration date. In other words, upon your death, your beneficiaries are certain to get the death benefit. Term life insurance, on the other hand, does not provide such a guarantee and only pays out if you die during the policy term.
Whole life insurance products also have a savings component. This sub-money account's grows tax-free at a predetermined rate. You can use this fund at any moment and for any reason as long as you are alive.
Whole life insurance is 10 to 15 times more expensive than term life insurance, but it is worth it for some people. The two most appealing aspects of whole life policies are lifelong protection and financial value. Because the payout is guaranteed, you may rest assured that, whatever happens, your beneficiary will get the policy profits when you die. The cash value of the insurance, on the other hand, is a supplemental nest egg that might be handy in an emergency or for retirement planning.
If you are interested in buying a whole life insurance policy, Dundas Life can help you secure the right coverage at the lowest-possible price.