Whole Life Insurance

What it protects against

Financial loss to beneficiaries due to death of the insured.

How it works

The oldest of permanent insurance products available today, whole life guarantees the death benefit will be paid as long as the premium is paid each year. The premium generally remains constant and is set high enough at time of purchase that it builds cash values in early years to help pay for higher insurance costs later in life. Participating whole life policies also offer upside potential. A participating policy allows owners to receive portions of the insurer's surplus each year in what is called a policy dividend. Owners may take the dividend in cash or reinvest it in the policy. Reinvesting can create larger dividends in ensuing years and raises the death benefit. Owners may access the cash value of a policy through loans, but loans may decrease the death benefit until they are paid back. Many whole life policies endow at age 100, meaning if the insured is still alive, the owner receives an amount equal to the death benefit less any outstanding loans. However, an endowment is subject to income tax on the amount that exceeds the policy's cost basis, while a death benefit is tax-free.

Who needs it

Those who need guaranteed coverage for life, either to protect a beneficiary or to help pay for estate taxes or other costs incurred at death. Also, those who want their life insurance costs to remain predictable and affordable throughout life.

Who may not need it

Anyone who may not need life insurance or those who need coverage only for a certain time - for example, a young family that needs protection only while children are young and until retirement income is saved.

When to buy it

Whole life insurance may be appropriate at any stage in life, even at older ages.

How to pay for it

Premiums that are the same every year.