What Is Whole Life Insurance, and How Does It Work?
Whole life insurance combines permanent life insurance with guaranteed investment growth. But it’s pricey.
Many, or all, of the products featured on this page are from our advertising partners who compensate us when you take certain actions on our website or click to take an action on their website. However, this does not influence our evaluations. Our opinions are our own. Here is a list of our partners and here's how we make money.
Whole life insurance is permanent life insurance with guaranteed investment growth. It is the most common form of permanent life insurance, but it’s also expensive.
Because part of your premium goes toward building your policy’s cash value, whole life insurance is best for people who have a lifelong need for coverage, as well as those interested in steady cash value growth and a guaranteed payout when they die.
Learn how whole life insurance works to see if this coverage might be a good fit for you.
Whole life insurance definition
A type of permanent life insurance that builds cash value over time. Whole life insurance typically lasts for your entire life as long as you pay your premiums.
What is whole life insurance?
Whole life insurance is a type of permanent life insurance that comes with three key features:
1. It generally lasts your entire life. Just be aware that many policies end if you reach age 100, and the payout may be less if you have outstanding loans when you die.
2. It has level premiums. This means your premiums are locked in and won’t change as long as you have the policy.
3. It has a cash value component. When you pay your premium, a portion goes to your policy’s cash value, which you can think of as a savings account that earns interest over time.
» MORE: Life insurance death benefit
How does cash value in a whole life insurance policy work?
The cash value in a whole life policy grows at a fixed rate set by your insurer — typically 1% to 3.5%, according to Quotacy, a life insurance brokerage. This sets whole life insurance apart from other permanent policies, which don’t guarantee returns.
It can take years or even a decade to build up enough cash value to begin tapping into it. Once you have enough cash value, you can start taking out loans against your policy. And when you die, your beneficiaries will typically receive a payout that isn’t subject to income tax.
If you have a whole life policy with a mutual life insurer — meaning the company is owned by policyholders instead of investors — you might be eligible for annual dividends based on the company’s financial performance.
You can choose to receive the dividend in cash, or use the funds to reduce your premium, repay cash value loans or buy additional coverage. Dividends are not typically taxed, but if you leave the funds in your policy to accumulate interest, you may be taxed on the earnings if or when you eventually withdraw the money.
What is the cost of whole life insurance?
In general, whole life insurance is more expensive than term life insurance. This is because it usually lasts your entire life and offers cash value growth. Commission fees might also be rolled into your total cost if you purchased the policy through a life insurance agent.
For a healthy, nonsmoking man buying a $500,000 policy at 40 years old, the annual cost of whole life insurance is $6,387 compared with $334 for a 20-year term life policy, according to Covr Financial Technologies, a life insurance brokerage. For a woman of the same age, a whole life policy might cost $5,860 a year compared to $282 for term life. The price rises for smokers as the health issues associated with smoking can make you riskier in the eyes of insurers.
Annual whole life insurance rates for nonsmokers
Age | Average annual rates for men | Average annual rates for women |
|---|---|---|
20 | $3,014 | $2,695 |
30 | $4,311 | $3,959 |
40 | $6,387 | $5,860 |
50 | $10,069 | $9,037 |
60 | $16,698 | $14,635 |
70 | $29,302 | $25,631 |
Source: Covr Financial Technologies. Lowest three rates for each age averaged. Data valid as of April 29, 2025. | ||
Annual whole life insurance rates for smokers
Age | Average annual rates for men | Average annual rates for women |
|---|---|---|
20 | $3,623 | $3,275 |
30 | $5,283 | $4,839 |
40 | $7,985 | $7,222 |
50 | $12,680 | $11,211 |
60 | $21,040 | $18,400 |
70 | $36,728 | $32,380 |
Source: Covr Financial Technologies. Lowest three rates for each age averaged. Data valid as of April 29, 2025. | ||
Pros and cons of whole life insurance
Predictable death benefit and premiums
Tax-deferred cash value that you can borrow against
Lifelong coverage
Higher premiums
Loans and withdrawals can affect death benefit
Cash value builds slowly
Is whole life insurance worth it?
Whole life insurance isn’t the best choice for everyone. But it may be a good option if you fit into any of the following categories.
You’re a high-income earner
If you can comfortably afford the higher premiums or you’re a high-income earner who’s maxed out retirement accounts like a 401(k) and IRA, then whole life insurance might suit your needs.
You like the comfort of extra savings
Whether you want to treat your life insurance policy as a cash asset or are looking for a policy that offers guaranteed returns on cash value, whole life insurance can function as a financial safety net.
You’re a special-needs parent
Parents of special needs children and young adults may prefer whole life policies that guarantee lifelong coverage to support dependents.
You want to provide for estate taxes
If you’re wealthy, you might need a whole life insurance policy to help your heirs pay estate taxes. In 2025, the federal estate tax threshold is $13.99 million, according to the Internal Revenue Service.
» MORE: Term vs. whole life insurance
How to find the right whole life insurance policy
Whole life insurance isn’t a cheap commitment, so make sure you research each of the following items and compare policies before buying.
1. Choose the right amount of coverage
To find out how much life insurance you need, first decide what you want the policy to accomplish. A relatively small policy — $10,000, for example — may pay for a funeral. But you’ll need more if you have other priorities, such as funding a trust for a child.
2. Examine riders
Life insurance riders are coverage you can add to a life insurance policy. Depending on the policy, they’re either included in the policy or can be purchased at an extra cost.
Examples include an accelerated death benefit or chronic illness rider, which lets you access some of the death benefit if you develop a chronic health condition or become terminally ill. Another add-on to consider is a waiver of premium rider, which lets you skip payments if you become disabled.
Types and costs of riders vary by insurance company, so make sure the policy quote includes the riders you want.
3. Look at the rate of return on cash value
With whole life insurance, part of your premium is added to your cash value, which can grow slowly on a tax-deferred basis. You can borrow against the cash value or surrender the policy for the cash once the policy has been in effect for a while. The death benefit may be reduced if you don’t repay a loan, and it doesn't pay out if you surrender the policy.
Whole life policies guarantee a minimum growth rate on the cash value. If you bought a policy with a mutual life insurance company, it might also earn dividends, which are portions of the insurer’s financial surplus. Life insurance dividends generally aren’t guaranteed, but they’re worth considering when you compare policies.
Life insurance companies sometimes give projections of how each policy’s cash value could perform. These are known as life insurance illustrations. Always ask which parts of the projection are guaranteed.
4. Be aware of surrender charges
Whole life insurance policies typically have a surrender charge for the first 10-15 years. This means if you decide to cancel or cash in your policy early, you’ll need to pay a fee. The surrender charge is usually a percentage of the cash value you’ve accumulated. In the early years, this fee may be close to 100%. The surrender charge decreases each year until it no longer applies.
5. Understanding the approval process
There are three main types of approval processes for whole life insurance:
Fully underwritten whole life insurance typically involves filling out a lengthy application and taking a life insurance medical exam.
Simplified issue whole life insurance involves answering some health questions, but there’s no medical exam.
Guaranteed issue whole life insurance means you’ll be accepted with no medical exam and no health questions. These policies are typically only available to people over 50.
Even if you have health issues, you’ll generally find the most competitive price with a fully underwritten policy.
Simplified issue and guaranteed issue life insurance policies are worth considering if you’ve been turned down for standard whole life coverage due to health problems, but be aware of the downsides. Death benefits on these policies are relatively small, and premiums can be expensive when compared with fully underwritten insurance.
In addition, these policies usually don’t pay the full death benefit if you die of natural causes or suicide within the first few years of coverage. This is known as the “waiting period” in policy documents, so always be sure to read the fine print.
6. Compare whole life insurance quotes
When you’re shopping for life insurance, get life insurance quotes for the same amount of coverage from several insurers to compare prices. You might find that rates for whole life insurance vary widely.
7. Check the insurer’s financial strength
Look up the financial strength rating of each whole life insurer you’re considering. You can find financial information through rating firms such as AM Best. Financial strength is important because a strong company has a better chance of being around decades from now to pay claims. NerdWallet typically recommends insurers with ratings of A- or higher.
8. Research the insurer’s reputation for customer service
You can see an insurer’s complaint index score on the National Association of Insurance Commissioners website. The score is based on the number of complaints filed against the insurance company in each state, adjusted for the company’s market share (based on premiums written). The average is 1, so a score higher than 1 means the company received more complaints than expected for its size.
Alternatives to whole life insurance
Whole life insurance fits the bill for some people, but term life insurance is sufficient for most families. While these policies have no cash value and expire when the term is over, they typically have much lower premiums than whole life insurance.
Another option is universal life insurance. These policies usually last your entire life and give flexibility to adjust your premiums and life insurance death benefit amount.
Use our tool below to find out which type of life insurance may be best for you.
» MORE: Average life insurance rates
ON THIS PAGE
ON THIS PAGE