INSURANCEONE AMERICA’S GUIDE TO BETTER COVERAGE
Step 3 of 6 Guide contents

Whole life

How does whole life work?

The short answer

It never expires and it builds a balance, but the early years are the expensive ones: cash it in then and you usually get back less than you paid. It is built for a need that lasts your whole life; a need with an end date is what term is built for.

It lasts your whole life instead of a set number of years, the price never changes, and part of what you pay builds a balance you can borrow against. It costs more than term for the same amount of coverage.

Don't know a word? Press any purple word to see what it means. They're all listed at the bottom of the page.

The trade you are making

The same trade as every other kind of insurance.

The trade

You either pay more up front through a higher monthly cost, or less up front and more when something happens.

TermYou pay little and own nothing at the end.
Whole lifeYou pay a lot and the coverage never expires.

Why the first years look like a bad deal

None of it is hidden. It is how the product is built.

In the early years most of what you pay goes to the cost of the insurance itself and to the commission paid when the policy was written. The balance inside it grows slowly at first and faster later.

Cashing it in early usually loses money

Cash it in during the first several years and you will usually get back less than you put in, sometimes nothing at all.

The shape of a whole life policy, early and late

There is a stretch at the start where cashing it in loses you money.

The shape every permanent policy has. Not a projection, and not any one policy.

Cumulative premiums paid against the amount you could get back The total you have paid in rises in a straight line from day one. The amount you could get back starts at nothing, stays low for the first several years, then rises faster and eventually crosses above what you have paid. The crossing point depends entirely on the policy. CASH IT IN HERE AND YOU USUALLY GET BACK LESS THAN YOU PAID IN THE CROSSOVER Where this falls depends entirely on the policy. Years you have held it What you have paid in What you could get back if you cashed it in

Swipe the chart sideways to see all of it →

We have deliberately left the dollars off both axes. Putting numbers on this shape would make it look like a projection of a real policy, and it is not one. On an actual policy, the only column that is a promise is the guaranteed one.

None of that is a scandal. It becomes a problem when somebody is sold it without being shown this shape, or sold it when term was the thing they needed.

Who it genuinely suits

Someone with a lifelong obligation rather than a temporary one.

  • A dependant who will never be independentA need that has no end date.
  • An estate large enough to owe estate taxA bill that arrives whenever the death does.
  • A business partner buyoutA business that has to buy out a partner whenever that partner dies, with no date on it.
If what you are covering has an end date

Step 2 covers the kind of coverage built for that.

Remember this

Term and whole life are answers to different questions. Neither one is the clever answer.

Words on this page

Whole life
Permanent life insurance with a price that never goes up. Part of what you pay builds cash value.
Next — Step 4 of 6: What about universal life, IUL and VUL? →