Written by
Brian Greenberg
CEO / Founder & Licensed Insurance Agent
Last updated: April 24th, 2023
Reviewed by
Nick Fenske
Licensed Insurance Agent
Table of Contents
Whole life insurance provides coverage for the entire life of the policyholder, as opposed to Term Life Insurance which just blankets the person for a specific time period. It also has a saving component in which cash value may be accumulated.
Whole Life insurance is a commitment between a policyholder and a company or individual generally referred to as the insurer. The contract, at its most primitive roots, basically states that the policyholder will pay a monthly quota to a third qualified party, and upon the death of the insured person – not necessarily the policyholder – the insurer will pay out a designated beneficiary a sum of money.
Contracts differ and other amendments, like loss of limb, critical illness, or terminal illness may trigger the payment (the benefit).
Life policies are legitimate obligations and the articles of the contract define the boundaries of the insured events. Particular omissions are oftentimes recorded into the paper’s legal fine print to limit the responsibility of the insurer; omission relating to fraud, war, suicide, riot, and civil commotion.
| Company | Price | Features | Quality |
|---|---|---|---|
| AARP | |||
| Gerber | |||
| Mutual of Omaha | |||
| New York Life |
It depends if you’re willing to pay more for the convenience and cash value a whole life insurance offers. It is a good policy to buy if you:
As of 2021, permanent life insurance costs 2 to 4 times more than term life insurance when comparing coverage dollar for dollar.
The cost can vary widely depending on your age, coverage, and health. Depending on your health, you may only qualify for guaranteed issue, which is a type of whole life insurance, but it’s most popular for individuals that can not qualify for any other type of life insurance.
| Age | Coverage | Cost |
|---|---|---|
| 20 | $100,000 | $46.13 |
| $250,000 | $88.32 | |
| 30 | $100,000 | $67.52 |
| $250,000 | $123.35 | |
| 40 | $100,000 | $104.86 |
| $250,000 | $179.11 | |
| 50 | $100,000 | $161.60 |
| $250,000 | $236.23 | |
| 60 | $100,000 | $264.82 |
| $250,000 | $390.41 |
The prices above are sample prices calculated for non-smokers based in Arizona in excellent health. Get a quote to calculate your price.
Unlike other life insurance policies, Whole Life Insurance is a bit trickier. It’s not as easy to obtain as Term Life Insurance, and many factors have to be considered by the possible policyholder and the insurance company willing to issue the contract.
Some factors life insurance providers will take into consideration for a whole life insurance policy are:
According to a 2020 report compounded by LIMRA and LifeHappens, over 54% of adults have whole life insurance. 29% more intend to buy life insurance at one point in their life. 40% of insured wish they could have purchased their policies sooner, at a younger age.
The amount paid upon the policyholder’s death, the “death benefit,” is normally the stated value on the contract. Nonetheless, if the policy is “participating,” the death benefits will increase depending on amendments the policyholder wrote into the plan.
What exactly does that mean? If the policyholder added an extra cash value for accidental death or a loss of limb, or some other tragic circumstance, then that cash value would be summed up as the original death benefit.
Whole Life Insurance has a “maturity” clause. The condition states that a policy “matures” at the time of death or when the policyholder reaches 100 years, whichever circumstance happens first. If the policyholder does reach the ripe age of 100, then they receive the whole face amount of their contract in cash. Policies issued since 2009 have increased this clause to 120.
Income Tax
The death benefit of whole life insurance is free of income tax. This includes internal gains in cash amounts. That same condition is equally true of other life insurance policies like group life, term life, and accidental death.
Nevertheless, when a plan is drawn out before death, the IRS treatment varies. Sometimes, any monetary gain over the total premiums paid will be taxable as ordinary income in these events. The tax-man makes a tally of how much you’ve invested, and then any amount received over that total is considered profit.
Most people have found the loophole around this tax practice to take cash values out as “loans” instead of a “surrender” of the death benefit. Any money is withdrawn from a trust or given out by an institution as a loan is free from income tax. Companies that offer these policies know of this trick and often charge a small interest less than each year’s dividend.
Estate Tax
Although whole life insurance benefits are free of income tax, the same can’t be said of the estate tax. In the United States, whole life insurance is considered part of an individual’s taxable estate.
Compared to other policies of its kind, Whole Life Insurance premiums are a general source of headache for people wanting to take the jump. Why? The premiums are far costlier than other plans. A typical $500.000 40-year term life policy from Legal & General would cost an average 20-year-old person about $700. That same policy in Whole Life Insurance format is about 5.8 times more; $4,060.
People are attracted to whole life because it grants coverage for an indeterminate length of time. It is the principal option for most when entering a certain age; mainly because it offers:
Companies also find whole life insurance policies desirable because it protects them against possible tragedies that may hurt their bottom line. Whole Life Insurance protects them against a key employee’s death and serves as a supplemental to executive retirement plans.
Of those who own life insurance, 44% of own a permanent life insurance policy in 2019. An increase of 7% over recent years.
It depends on your overall wants and needs. We recently explored the differences between term and whole life insurance. If you want simple coverage for a predefined term, like 20 years, a whole life policy probably isn’t worth the cost. In that case, you could go with term life insurance instead for a fraction of the cost.
On the other hand, if you want life insurance coverage for the rest of your life without having to worry about an end date or having to re-apply, whole life insurance could be right for you.
There’s also the scenario of health conditions. You may also not qualify for term life insurance if you are in poor overall health or have serious health conditions. In that case, a guaranteed issue policy may be your only option.
Whole life insurance can also provide cash and support to the policy-holder during life. That’s right; there’s a way to tap into your insurance and pamper yourself in your old age.
Cash-value life insurance is a kind of permanent life insurance that carries an investment feature. In Whole Life Insurance, the cash value is a slice of your policy that the company invests in your favor and, in turn, earns interest as it matures. When you purchase whole life insurance, the premium you pay doesn’t just cover the amount handed over to your beneficiaries once you die (the death benefit). It is also funneled into a cash-value account. This account grows either at a fixed or variable rate, depending on the policy, company, and contracts you acquired.
And that money?
Well, it earns interest… and you can withdraw or borrow against it as it matures with you.
You can normally borrow part or all of that cash-value account. You can take out a portion of what you have already paid in premiums or even more (the accrued interest those funds have earned).
But why take out a loan and not withdraw the money? Why pay the company credit for this loan? It is your money, after all.
That’s because the insurance company will charge almost next to nothing in interest for that loan. But why pay interests at all? Because a loan, according to the American Institute of CPAs, isn’t considered taxable income.
Nonetheless, if you die while paying the said loan, the outstanding amount will be substrates from the net value of your death benefits.
The simplest way to get cash out of your Whole Life Insurance policy is to call your company and ask them for it. It’s a simple call, and they’ll wire the amount to your bank account.
Withdrawals are taken from your basis (that’s the amount you’ve already invested through premiums). That amount, “the basis,” is tax-free; the government considers it your money, and they’ve already taxed you somewhere along the line for it. They can’t double-dip.
For example, you’ve given the company, after some calculating (you have to figure in operational costs and other incidentals), the “basis” of $30,000. That whole amount is yours to do with as you please. Everything above that $30K is interest and profit.
Nevertheless, anything above the “basis” is considered earned income by the government lackeys in the IRS. If you tap into that portion, you’ll have to pay taxes.
Another thing to consider, taking money out of your policy reduces your death benefit.
You can cancel your policy. The company, in turn, will return a portion of what you’ve given them (they’ll first subtract unpaid premiums, loans and may charge an additional surrender fee).
You can cancel your policy. The company, in turn, will return a portion of what you’ve given them (they’ll first subtract unpaid premiums, loans and may charge an additional surrender fee).
You’ll only receive part of what you’ve given them. Also, you will be charged income tax on a portion of the money they hand over.
You may also be able to use your policy and the interest it has accrued to pay premiums. If you have no outstanding loans and the Whole Life Insurance has had time to mature, you can use interests (the cash value) to pay for your policy.
With universal life, a type of whole life insurance, the insurance company sets a minimum interest rate based on the contract for the policy (usually a low 2-3%). From there, if the insurance company’s overall portfolio gains in value, then part of the increase is added to the cash value of the company’s universal life policies, up to the maximum percentage amount listed in the policy contracts.
If the company’s portfolio does not have a significant gain, or if it takes a loss, the insurance company is still obligated to pay the minimum interest stated in the policy contracts.
Fees and commissions aside, permanent life insurance makes sense in a number of circumstances. It is advantageous for people from an insurance perspective whenever a person fears that they may not be able to renew term life insurance policies due to illnesses, disabilities or disorders that may present later in life. Permanent life insurance is just that – permanent. There is something to be said for buying the knowledge that you will always have coverage in place and that is one of the key benefits of a cash value policy.
The insurance product also makes sense when the purchaser wants the option to infuse predictability into their long term care expenses. When coupled with long term care riders, permanent life insurance can create a heavily tax-advantaged pool of money to provide for nursing home care. People expecting to rely on Medicaid subsidies to provide also benefit from whole life insurance plans when they are held in an irrevocable trust. Because assets in these trusts will not disqualify you from Medicaid eligibility, they can be used to transfer wealth to heirs, provide a steady stream of discretionary income, and can pay for final expenses.
Investors with a high net worth would also do well to consider using cash value insurance as a mechanism to avoid the estate tax. Couples with a net worth exceeding $10.98 million at the time of their passing are subject to the federal estate tax. It’s quite a hefty tax and for those who qualify, it will take 40% of every dollar over $10.98 million.
Don’t think that an estate tax is something that you would ever need to worry about? Think again! All of these states have independent estate taxes and some of them kick in at estate values as low as $1 million and that often includes your primary residence. Because state estate taxes are taken on top of federal taxes, it doesn’t strain the imagination to consider the case of someone who is close to a federal or state estate tax limit benefiting from the purchase of whole life insurance, annuities, and the use of irrevocable trusts to strategically exempt some of their assets from their taxable estate.
Consider a woman who lived in Oregon at the time of her passing. If she had an estate worth $1.5 million when she died, $500,000 of her estate would be exposed to a 10% state tax. That costs her heirs a whopping $50,000. Had she used a combination of irrevocable trusts and cash value insurance to shelter $500,001 of her estate’s value, her net worth would have remained the same, she could have accessed her investments through sheltered withdraws from her life insurance policies, and her estate would have been immune to the estate tax.
Knowing how much this saved in comparison to the fees and expenses associated with cash value insurance is challenging because the fee structure of every plan is different. What isn’t hard to say is that sheltering any money from a 40% federal tax and a state tax that exceeds 10% is a big move that demands serious consideration.
Brian is the founder and CEO of Insurist and carries Life, Health, and Property & Casualty licenses in all 50 U.S. states. Since 2013, Brian has been a member of Million Dollar Round Table, a designation for the top 1% of financial advisors worldwide. Brian has been featured in Yahoo! Finance, Money.com, Entrepreneur.com, Life Happens, Forbes, MSN, and Good Financial Cents. Brian’s goal is to show customers the best products, the quickest answers to their questions, and provide expert advice.
Nick has worked in the insurance industry selling life insurance, endowment and retirement and annuity products. He has also worked as an consultant to Independent Financial Advisors, educating them about products and helping them meet the needs of their clients.
