Whole Life Insurance Pros and Cons

When you’re considering life insurance, you’re likely to have a lot of questions. Do I need life insurance if I don’t have a family? Am I too young (or old) to purchase a policy? How much coverage should I have? Can I afford it? What kind of policy is right for me?

The list goes on. 

As you’re weighing the different types of life insurance policies, you will likely consider whole life insurance. What is it, and what are the pros and cons of whole life insurance?

Advantages of whole life Insurance

Whole life insurance has many potential benefits that might make it a strong part of your financial plan.

1. It will pay a benefit

This is one of the key benefits of a whole life insurance policy. As long as you stay current on your policy and pay your premiums, your policy will pay a death benefit someday. Unlike a term life insurance policy, which ends at a certain point in time, a whole life policy will pay a death benefit regardless of when you die.

2. It has predictable premiums

Unlike some other types of life insurance, your premiums (the amount you pay), will remain the same for as long as you have your policy, regardless of your age or any changes to your health. Eventually, with some policies, you will be done paying your premiums, but the life insurance will continue.

3. It's an asset

Whole life insurance builds cash value over time as you pay your premiums. Depending on your policy, that cash value could grow to a substantial amount in the future. And once you have it, it won’t decline with the market. You can use the cash value throughout your life, and it can become a key part of your retirement plan, helping you to weather bad markets.¹

4. It may pay dividends

The cash value of whole life insurance is guaranteed to grow at a certain rate, which is based on assumptions life insurance companies make. If the company you bought your policy from performs better than it anticipated, it may pay a dividend (Northwestern Mutual has paid one every year since 1872²). You could use that money to pay your premiums or reinvest in your policy, or you can take the dividend as cash.

Want to talk it through? A financial advisor can show you how whole life insurance can be a critical component of your financial plan.

5. It has tax advantages

Whole life insurance has several tax benefits. First, the death benefit is typically tax-free. In addition, the growth of the policy’s cash value is tax-deferred. That means you won’t pay taxes on the money or dividends that you earn (if you reinvest them in your policy) while your policy is in place. While you would owe tax on your earnings if you ever surrender your policy, the tax-deferred growth can allow your cash value to grow even faster.

You can use the cash value through your life, and it can become a key part of your retirement plan, helping you to weather bad markets.

In addition, you may be able to exchange a whole life insurance policy for other types of insurance in the future (perhaps an annuity).

Disadvantages of whole life Insurance

Though the benefits of a whole life insurance policy are attractive, there are also some drawbacks that you should consider before committing to a whole life policy.

1. It's more expensive than term

Because it won’t expire and builds cash value, a whole life policy is also more expensive than a term policy with a comparable death benefit. Because of that, people will often buy a mix of term and whole life to get a large death benefit while also taking advantage of the additional benefits of a whole life insurance policy.

2. It's more complex than term

Term insurance is pretty easy to understand: You pay a certain amount each month for a certain death benefit. With whole life insurance, there’s more to consider. Depending on your policy, there could be different rates of guaranteed cash value growth. How dividends are paid out can vary from company to company and sometimes be confusing. The complexity can actually work to your advantage, as you can tailor a whole life insurance policy to suit your specific needs. But that’s why it’s important to work with a financial professional and company you trust. One of the best ways to decipher different types of policies is to ask about past performance.

Term vs. whole life Insurance pros and cons

The difference between term and whole life insurance is a bit like the difference between renting or buying your home. Term is like renting. You pay for something and get a place to live while you are paying. When your lease is up, you leave the home. Whole life insurance is like buying a home. With each payment, you’re building equity in an asset. Eventually, you will pay for your home and own it. You can continue to live there and have the asset.

¹ Each method of utilizing your policy's cash value has advantages and disadvantages and is subject to different tax consequences. Surrenders of, withdrawals from and loans against a policy will reduce the policy's cash surrender value and death benefit and may also affect any dividends paid on the policy. Policyowners should consult with their tax advisors about the potential impact of any surrenders, withdrawals or loans.

² Dividends are reviewed annually and are not guaranteed.