Whole Life Insurance Pros and Cons

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

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? And the list goes on. 

As you weigh the different types of life insurance policies, you’ll likely consider whole life insurance. Here, we’ll share whole life insurance pros and cons. 

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.

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 (the amount you pay), 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 eventually pay a death benefit no matter what age you pass away.

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. You can use it for any reason, like home renovation or helping out your kids with college expenses.³  

And the cash value can become a key part of your retirement plan, helping to ease the impact of down markets. 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 at a set rate, based on assumptions life insurance companies make. If the company you bought your policy from performs better than anticipated, it may pay a dividend. (Northwestern Mutual has paid one every year since 1872.)¹  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 the second option, you’ll be adding a slice of 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. 

5. It has tax advantages.

Whole life insurance has several tax-related advantages. 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 surrendered your policy, the tax-deferred growth can allow your cash value to grow even faster. 

In addition, you may be able to exchange a whole life insurance policy for other types of insurance in the future (such as an annuity). A section of the tax code referred to as “1035” allows you to exchange the values for certain types of life insurance policies for similar financial tools, typically without incurring taxes. To avoid tax penalties, you’ll need to follow IRS guidelines around what exchanges are allowed and how the exchange can take place.

Disadvantages of whole life Insurance 

Though 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. 

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. 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. 

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. 

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, 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. 

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.⁴  

Term vs. whole life insurance pros and cons 

As you think about insurance, remember that 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. 

If you’re considering life insurance, reach out to your Northwestern Mutual financial advisor. They can talk through the pros and cons of our solutions. They can also review your overall financial plan to look for opportunities and blind spots that you might be overlooking.