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What is whole life insurance?

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Dec. 16, 2018. Whole life insurance is a type of life insurance on which you pay premiums from commencement of the policy until you die, in exchange for a large payout from your insurer to your beneficiaries upon your death.

Whole Life versus Term Life Insurance

On a term life insurance policy, you pay your premiums only for a set period of time; for example, for the 25 years while your kids are at school and studying. If you die during this period, the policy pays out to your beneficiaries. If you are still alive by the end, the coverage ends with no payout.

On a whole life policy, you pay premiums until you die and it pays out upon your death. It is initially more expensive than a term life policy, primarily because it includes a cash value component and because, unlike the annual increases with a term policy, your premiums remain the same over time.

The benefits of Whole Life Insurance

  • The premiums remain fixed and thereby predictable over time.
  • The payout is guaranteed, unlike in term life policies where you lose your premiums if you remain alive for the course of the policy term.
  • Whole life policies can provide an amount for your spouse or children upon your death.
  • It can cover your funeral expenses.
  • The payout is a tax-free income for your beneficiaries.
  • If you have property that you want your kids to inherit, you can use your life policy payout to cover the taxes due on this property so your kids can inherit without the worry of paying the taxes.
  • No one can claim the payout if you are in debt, since it belongs to your beneficiaries, not to you.
  • If you take out a whole life policy for your children when they are still young, the cash value can help to fund their education, future holidays, and periods of unemployment.
  • It can supplement your retirement income through its cash value.

Cash value

The premiums that you pay into your whole life policy contribute, not only to death benefit like in the case of a term policy, but also to cash value. Your insurer invests them and they draw interest. Over time, an increasingly large percentage of your premiums and policy consist of cash value rather than death benefit, until the whole policy eventually consists of the cash value. The cash value is similar to a savings account. You can draw from it or take a loan from it, such as for your retirement, a sabbatical, or a period of poor health.


Throughout its lifetime, a whole life policy pays dividends from the insurer's excess profit. This is money that you can either withdraw or invest back into the policy for a larger cash value or death benefit.

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