You have a family to protect, a legacy to leave, or both, and you know a life insurance policy can help you do that. But with so many coverage options, it can be hard to choose.

There are two main types of life insurance: term life insurance and whole life insurance. Both options offer a tax-free death benefit to your heirs, but beyond that, they function differently.

Let’s explore whole life insurance, including what it is, how it works, how much it costs and how it compares to term life coverage. That way, you can decide which policy might be right for you.

What is whole life insurance?

Whole life insurance is a form of permanent life insurance, which means the coverage remains in force until you die as long as you pay your premiums.

The death benefit, sometimes referred to as the face value of the policy, gets paid out to your beneficiaries once your heirs file a claim and provide the insurer with a copy of your death certificate.

Generally, your beneficiaries will receive the funds in a lump sum. However, your insurance company may be willing to pay in installments or through an annuity.

On the other hand, term life insurance provides protection for a set period – often 10, 20 or 30 years. If you die within the term, your heirs will receive the death benefit, but if you die after the term ends, your heirs will get nothing.

Whole life insurance cash value

In addition to a death benefit, your whole life policy builds cash value (albeit slowly) that you can borrow from or withdraw, use to cover your premiums or use to purchase more coverage.

When you pay your premium, the money gets split between your insurance coverage, your cash value account and the insurer’s expenses.

Your cash value will grow faster when you’re younger because your actual insurance costs less since you’re a lower risk. However, it can still take many years to accumulate a meaningful sum.

Your insurance company will pay a fixed interest rate on your cash value balance, helping it grow. Generally, the rate will be lower than you could get investing the money in the stock market, but higher than you could get stashing the funds in a traditional savings account.

Tapping into your cash value may help you if you’re in a financial pinch, but doing so can have consequences.

For instance, taking a partial withdrawal or not repaying a loan will result in a lower death benefit for your heirs. If you use your cash value to cover your premiums and the money runs out, you must start making payments again, or your policy will lapse.

In addition, your heirs will only receive your policy’s death benefit. Your insurance company will retain any cash value in your account.

Important note: While whole life insurance death benefits and cash value contribution withdrawals or loans are generally tax-free, any investment gains in your cash value account will likely be taxable when you take out those funds.

Other features of whole life insurance

Your whole life policy may include additional benefits and features, such as dividend payments or riders. If your insurer issues participating policies, you’re eligible to receive dividends.

If your insurer issues non-participating policies, you won’t receive any dividends. Depending on your policy’s rules, you may be able to apply your dividends to your cash value account or use them to buy more coverage.

The riders (addendums to your policy) you choose can enhance your financial plan. One popular policy addition is the living benefit rider. Under this rider, you can get a portion of your death benefit in advance if you’re diagnosed with a terminal illness (generally with a prognosis of a year or less). You can use the money to cover your medical care.

Another popular rider is the waiver of premium rider. If you become disabled and unable to pay for your policy, your insurance company may allow your coverage to remain in effect as though your payments were made on schedule.

Whole life insurance premiums

Most people pay their whole life insurance premiums monthly. However, your insurance company may allow you to pay for your policy in a lump sum (very high upfront cost) or over a limited number of installments.

Your insurance company may also offer a modified premium schedule, where required payments start low and increase after a set number of years.

Whole life insurance costs

Since a whole life insurance policy lasts until you die and allows you to build and access cash value, it costs significantly more than a term life policy featuring the same death benefit.

According to Policygenius, as of October 2024, here are the average premiums for $500,000 in whole life coverage on non-smoking insureds through MassMutual:

Here are the average premiums for $500,000 in term life coverage for non-smoking insureds over a 20-year term (across multiple insurers):

As you can see, term life coverage costs a fraction of whole life coverage.

Pros and cons of whole life insurance

As is the case with every financial product, whole life insurance has pros and cons, such as:

Pros

Cons

Is whole life insurance right for you?

When you’re trying to determine which type of life insurance is right for you, you must ask yourself a few questions:

If you just want to protect your family while your kids are still in school, a less-expensive term life insurance policy may be your best bet.

However, if you want to leave your heirs a financial gift no matter how long you live, a whole life insurance policy may be worth it.

Some financial experts recommend obtaining a term life insurance policy and investing the difference in premiums to get protection and build wealth for future generations. However, this strategy may not work for you.

If you’re unsure what kind of life insurance you need, consider speaking with an insurance agent or financial professional for personalized guidance.

(Laura Gariepy is a contributing writer to Kiplinger.com.)

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