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.
Katia Iervasi
By Katia Iervasi 
Edited by Lisa Green Reviewed by Tony Steuer

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Nerdy takeaways
  • Whole life insurance typically lasts your entire life, but it can be expensive.

  • Part of your premium goes toward building your policy’s cash value, which functions like a savings account that earns interest over time.

  • 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.

If you want life insurance that won’t expire within a few years or decades, consider a whole life insurance policy. It’s the most common form of permanent life insurance, but it’s expensive.

To find out if you’re a good candidate for this type of coverage, learn how whole life insurance works and the policy features to look for.

A savings component within a permanent life insurance policy that grows over time. You can generally use your policy’s cash value to withdraw money, take out a loan and more.

The price you pay for life insurance, usually monthly, quarterly or yearly. Premiums for whole life insurance stay the same for the life of the policy.

Term life insurance

Life insurance that only lasts a set number of years, such as 10, 20 or 30. Term life insurance is suitable for most people.

Whole life insurance

A type of permanent life insurance that comes with a cash value savings element. 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 reduced 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. 

How does cash value in a whole life insurance policy work?

The cash value in a whole life insurance policy grows at a fixed rate set by your insurer — typically 1% to 3.5%, according to Quotacy, a brokerage firm. This sets whole life insurance apart from other permanent policies, which don’t guarantee returns.

Once you’ve accumulated 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.

Did you know...

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, plus commission fees might 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 $4,471 compared with $340 for a 20-year term life policy. For a woman of the same age, a whole life policy might cost $4,123 a year compared to $288 for term life. The price tends to rise for smokers, as the health issues associated with smoking makes applicants riskier in the eyes of insurers.

Annual whole life insurance rates for nonsmokers


Average cost per year for men

Average cost per year for women
















Source: Quotacy. Lowest three rates for each age averaged. Rates reflect premiums paid monthly for one year. Data valid as of March 20, 2024.

Annual whole life insurance rates for smokers


Average cost per year for men

Average cost per year for women
















Source: Quotacy. Lowest three rates for each age averaged. Rates reflect premiums paid monthly for one year. Data valid as of March 20, 2024.

Is whole life insurance worth it?

Whole life insurance might be a good fit for you if:

  • You can comfortably afford the higher premiums.

  • You’re a high-income earner who’s maxed out your retirement accounts, like a 401(k) and IRA.

  • You want to treat your life insurance policy as a cash asset.

  • You have a lifelong dependent, such as a child with special needs.

  • You’re looking for a policy that offers guaranteed returns on cash value.

  • You’re a wealthy individual who wants your life insurance policy to help your heirs pay estate taxes.

How to find the right whole life insurance policy

A whole life insurance policy is a pricey commitment, so make sure you research and compare policies before buying.

Choose the amount of coverage you need

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 additional priorities, such as funding a trust for a child.

Examine riders

Life insurance riders are coverage features you can add to a life insurance policy. Depending on the policy, they’re either included in the coverage 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.

Available types and costs of riders vary by insurance company, so make sure your policy has the riders you want before you buy.

Look at the rate of return on cash value

With whole life insurance, a portion of your premium is added to your cash value, which typically grows slowly on a tax-deferred basis. You can borrow against the cash value or surrender the policy for the cash. 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 has the potential to earn dividends, which are portions of the insurer’s financial surplus. Life insurance dividends generally aren’t guaranteed, but they’re worth taking into account when you compare policies.

🤓Nerdy Tip

Life insurance companies sometimes provide 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.

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 your coverage, you’ll need to pay a fee, which is a percentage of the cash value you’ve accumulated. In the early years, the surrender charge may be close to 100%. The surrender charge decreases each year until it no longer applies.

Understand the different approval processes

There are three main types of approval processes:

  1. Fully underwritten whole life insurance typically involves filling out a lengthy application and taking a life insurance medical exam.

  2. Simplified issue whole life insurance involves answering some health questions, but there’s no medical exam.

  3. Guaranteed issue whole life insurance means you’ll be accepted with no medical exam and no health questions.

Even if you have some 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 products. In addition, these policies don’t pay the full death benefit if you die of natural causes or suicide within the first few years of coverage.

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.

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 a rating firm 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.

Any company with an AM Best rating of B+ or higher has a good ability to meet its obligations, in AM Best’s opinion. NerdWallet typically recommends insurers with ratings of A- or higher.

Research the insurer’s reputation for customer service

You can look up an insurer’s complaint index on the National Association of Insurance Commissioners website. The score is based on the number of complaints filed against the insurance company with state regulators, 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 will expire after the term is over, they also typically have much lower premiums than whole life insurance.

Another option is universal life insurance. These policies usually last your entire life and give you the 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 about whole life insurance

Learn more about how whole life works and where to find a policy.

Frequently asked questions

Whole life insurance is a type of permanent life insurance that typically lasts your entire life, as long as you’ve kept up with your premiums. It also includes a cash value element that grows over time. Once you’ve earned enough cash value, you can use it to take out a loan, pay your premiums and more.

Unlike whole life insurance, term life insurance expires after a set number of years — typically 10, 20 or 30 — and doesn’t build cash value. It’s generally much cheaper than whole life insurance and is suitable for most people.

A $500,000 whole life insurance policy costs around $3,310 a year for a healthy 30-year-old man. Like most types of life insurance, whole life insurance rates are based on factors like your age, health, lifestyle and smoking status.

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