Should You Get Whole Life Insurance? Pros and Cons to Consider

Sean McGinn is an assistant director of Product Positioning in the Insurance Solutions department at Northwestern Mutual.

When 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? And if you’re comparing options, you may also wonder whether whole life insurance is worth the higher cost—or whether getting a term life insurance policy and investing the difference would be a better fit.

Those are fair questions. Whole life insurance is not the lowest-cost type of life insurance, and it’s not right for everyone. But it also isn’t meant to replace term insurance or your investments. Instead, whole life insurance can be one part of a broader financial plan, providing lifelong protection, predictable premiums, guaranteed cash value growth, and flexibility you can use over time. Here, we’ll walk through the pros and cons of whole life insurance so you can better understand where it may fit—and where it may not.

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’ll pay a death benefit.

The death benefit is one of the key benefits of a whole life insurance policy. So long as you stay current on your policy and pay your premiums, it is guaranteed to pay a death benefit someday.

That’s different from a term life insurance policy, which ends at a certain point in time (usually 10–30 years); if you outlive the term, the policy typically ends without paying a death benefit.

2. It has predictable premiums.

Unlike some other types of life insurance, your premiums will remain the same for as long as you have your policy,² regardless of your age or any changes to your health. (Eventually, with some policies, you’ll finish 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. And once you have cash value, its growth is guaranteed, and the value won’t decline with a market downturn. One of the benefits of whole life insurance is that you can use the cash value throughout your life by borrowing against your insurance.³ You can use it for any reason, like helping your kids with college expenses.

And the cash value can become a key part of your retirement plan. For example, you might be able to ease the impact of a market downturn by tapping into some of your cash value instead of selling some of your assets while they are devalued.

4. It may pay dividends.

The cash value of whole life insurance is guaranteed to grow, based on assumptions life insurance companies make. If the company you bought your policy from performs better than anticipated, it may pay a dividend. With a mutual life insurance company, dividends may be paid to eligible policyowners; with a stock life insurance company, profits may be paid to shareholders instead. (Northwestern Mutual has paid a dividend every year since 1872.⁴) You could use that money to pay your premiums or reinvest in your policy, or you can take the dividend as cash.

If you choose to reinvest the dividend, you’ll be adding more insurance onto your policy. This works to your advantage by setting new levels for the death benefit and cash value. These values won’t drop unless you take money out of your policy or other policy changes.

5. It has tax advantages.

Whole life insurance has several tax-related advantages. First, the death benefit is generally income tax-free. This means that if you have a whole life insurance policy and your loved ones receive a payout from it, they usually won’t have to pay income tax on the money.

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 surrendered your policy, the tax-deferred growth can allow your cash value to grow even faster.

You may also be able to exchange a whole life insurance policy for other financial tools in the future (such as a long-term care policy) using what’s known as a 1035 exchange, typically without incurring taxes at the time of the exchange. To avoid unexpected taxes or penalties, you’ll need to follow IRS guidelines around what exchanges are allowed and how the exchange can take place, and look at your contract. The exchange should be structured correctly to avoid unintended tax consequences.

Disadvantages of whole life Insurance

Although the benefits of a whole life insurance policy are attractive, there are also some drawbacks to consider.

1. Payments are higher than for term insurance.

Whole life is not the lowest-cost form of life insurance, and it should not be positioned that way. Because it won’t expire and builds cash value, you’ll pay more for a whole life policy than a term policy with a comparable death benefit. Its higher premium reflects a different design: lifetime coverage, predictable premiums, guaranteed cash value growth, and the ability to provide value during your lifetime when the policy is properly structured and maintained.

Keep in mind that term insurance costs less because most people are still alive when the term ends. That makes sense because term insurance is meant to be temporary.

Whole life insurance may be a good fit if you want permanent coverage, predictable premiums, guaranteed cash value growth, and flexibility you can use over time. It may be less appropriate if you need coverage only for a specific period, need the lowest initial cost, or want to prioritize market-based growth.

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.

The complexity can actually work to your advantage because 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.

You should also consider a company’s reputation and financial strength. At Northwestern Mutual, we've earned the highest financial strength ratings awarded to life insurers from all four major rating agencies.⁵

How to evaluate the pros and cons of term vs. whole life insurance

As you think about insurance, remember that the difference between term and whole life insurance is a bit like the difference between renting and 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.

In many cases, the choice is not simply term or whole life. Term insurance can help cover temporary needs at a lower initial cost, while whole life can provide permanent protection, guaranteed cash value growth, and flexibility over time.

Your Northwestern Mutual financial advisor can talk through the pros and cons of different types of life insurance and help you decide what mix of protection, growth, and flexibility makes sense for your goals and budget. They can also review your overall financial plan to look for opportunities and blind spots that you might be overlooking.

Frequently Asked Questions

What is the downside of whole life insurance?

The main downside of whole life insurance is that it typically costs more than term life insurance. It is also more complex because it includes long-term guarantees, cash value, and policy options that need to be understood and managed over time.

Is whole life insurance actually worth it?

Whole life insurance can be worth it if you want lifelong coverage, predictable premiums, guaranteed cash value growth, and flexibility that can support your broader financial plan. It may be less appropriate if you need only temporary coverage, need the lowest initial cost, or are primarily focused on market-based investment growth.

Does your money grow in whole life insurance?

Yes. Whole life insurance builds cash value over time as you pay your premiums. Once you have cash value, its growth is guaranteed, and the value will not go down because of market performance (though accessing it through loans or withdrawals can affect the policy).

Who should consider whole life insurance?

You may want to consider whole life insurance if you value permanent protection, predictable premiums, guaranteed cash value growth, and financial flexibility over time. It can be especially helpful when it is part of a broader plan that also includes term insurance, investments, and other financial tools.

How long until whole life insurance pays out?

A whole life insurance policy is designed to pay a death benefit whenever you pass away, so long as the policy remains in force. That is different from term life insurance, which covers you only for a set period.