Whole life insurance: what is it and how does it work?

It is possible that, during the search for the perfect life insurancehave you met him whole life insurance or whole life insurance. But have you ever wondered what whole life insurance is and how it works, and how it differs from other life insurance on the market?

To begin, it is important to note that whole life insurance provides monetary coverage for the life of the insured. Unlike term life insurance, the insurer will not only pay the beneficiary if the insured is declared dead during the term of the contract, but also It will also allow the accumulation of interest on the value of the policy, just as a savings account would..

These policies are also known as permanent or traditional life insurance.. Whole life insurance policies are one of many permanent life insurance policies. Some of the life insurance similar to it would be universal, index universal, and variable universal life insurance. But let’s not get confused! In a little while, we will analyze the differences.

How does whole life insurance work?

Whole life insurance: what is it and how does it work?

whole life insurance guarantees the payment of an economic benefit for the death of the insured. Here we must take a short pause to understand in depth how the life insurances. And it is that, in terms of insurance, there are three participants in the equation:


The owner of an insurance policy is responsible for paying the premiums but is not necessarily the insured person.. A husband can buy life insurance for his wife. In this case, his wife’s life is insured, but he would be responsible for paying the premiums. The car insurance holder would be the owner of the vehicle.


The insured is the asset to be preserved, that is, the one to which a monetary value is given.. In the case of health insurance, the insured value is the health of that person who can access hospitals and clinics; If we talk about car insurance, the insured would be the asset, that is, the car. In the case of life insurance, it is, therefore, the life of the person. As the life of the person is linked to his condition as a human being, he will become the insured. The insured may or may not be the policy holder, but never the beneficiary.


the beneficiary is the one who receives the economic benefit from the insurance company. It can be one person or several. The policyholder can determine specific beneficiaries or leave the monetary benefits to their universal heirs. In the case of a car policy, the beneficiary is the same holder, who is the owner of the vehicle. In the case of life insurance, the beneficiary will always be someone different, unless we are talking about insurance with a savings and loan component. In this scenario, the insured – still alive – could make withdrawals or request loans against the value of the policy

What is whole life insurance?

As long as the policyholder religiously pays the insurance premiums, the beneficiaries will receive a specified amount of money in the event of the insured’s death. Now, unlike other life insurance, whole life insurance works with a savings policy called “cash value.”

But what is the savings component? It is that the money invested in the policy can be increased by the application of interest. This growing value of money is one of the essential components of whole life insurance.

In order for this cash value to be generated, the cardholder must remit payments in addition to the scheduled premiums. Dividends can be reinvested in the cash value so that it continues to earn interest. It is this cash value that provides a vital benefit to the policyholder by serving as a kind of source of equity.

To access cash reserves, the insured has two options. The first is to request a withdrawal of funds. And the second is to request a loan against that insured value. Of course, the loans will be subject to a specific rate that will vary depending on the insurer.

Note: One of the most attractive factors of whole life insurance is that the owner can withdraw the funds without having to pay taxes., at least up to the value of the total premiums paid to the insurance company. Loans that are not fully repaid will reduce the policy insured’s death benefit. Withdrawals only reduce the cash value, but not the benefits paid to beneficiaries in the event of the insured’s death.

Important: Remember that whole life insurance is different from term life insurance. The latter is only available for a set number of years. As long as the holder pays his premiums, the whole life policy will have a term that will remain tied to the life of the insured.

What is the benefit on a whole life insurance policy?

The benefit for the death of the insured is usually a fixed amount of money that is established in the policy contract. Some policies are also eligible for dividend payments. In this case, the policyholder can choose to have the dividends added to the policy benefit (which will increase the amount payable in the event of the insured’s death) or take out loans. You can also make withdrawals. Withdrawals generally only affect the accumulated dividend, while unpaid loans would reduce the amount of the policy benefit.

Many insurers also offer policies with a special policy, which is that if the insured becomes disabled or diagnosed with a serious illness, a benefit will be paid.

Note: The beneficiaries of the policy do not have to add the money they receive from the company to their gross income for the payment of taxes. However, it is important to note that benefits are not always transferred immediately upon death. The policy holder could have established that the money be allocated to a savings account and that, gradually, allocations be distributed to the beneficiaries.

Important: The interests that accumulate in that account will be subject to the payment of taxes. Therefore, the beneficiaries will have to report them to the IRS. For more information, review our guide to life insurance with savings.

Whole life insurance example

Suppose ABC Insurance issues a $25,000 life insurance policy to Mr. Smith, who is both the owner and the insured.. Over time, the value of that money accumulates $10,000. Upon Mr. Smith’s death, ABC Insurance will pay the insured’s full death benefit, which is $25,000. However, the company would only lose $15,000 due to the accumulated cash value, which is $10,000. In this case, the net amount of the risk in question was $25,000, but at the time of the insured’s death, this amount changed to $15,000.

Important: As we said before, most life insurance policies have a clause that allows the insured to withdraw that amount of money or also cancel the coverage and receive a cash surrender value.

History of whole life insurance

From 1946 through the late 1960s, whole life insurance was the most popular policy in the country. Insurance companies offered families the opportunity to insure the life of the head of the household so that their spouse and children would not be left unprotected in the event of their premature death. In addition, they also had an important role in retirement planning.

After the passage of the Tax Equity and Fiscal Responsibility Act (TEFRA) in 1982, many banks and insurance companies began to look up to the interest accrual policy. People then preferred to invest in the purchase of an insurance policy instead of opting for stock market investments.

But after the annualized rates of return for the S&P 500 Index were adjusted for inflation to 16.75% in 1982 and 18.63% in 1983, consumers began to invest more in the stock market and term life insurance and stopped preferring whole life insurance policies.

In short, what is whole life insurance and how does it work?

Whole life insurance has a permanent validity or, better said, tied to the life of the insured. This differentiates it very well from term life insurance, which has a specific term, usually 5 or 10 years.

  • The insurance company that offers whole life insurance pays the beneficiary – or beneficiaries – if the death of the insured is declared, who may or may not be the policyholder himself. This transfer will be made as long as the policy holder continues to comply with the premium payments..
  • Although whole life insurance transfers an economic benefit upon the death of the insured, also has a savings component allowing for cash growth.
  • This savings component can be invested. For example, the beneficiary or the owner himself -in case of being the insured- could access the cash while he is alive, either by withdrawing it or borrowing it whenever necessary.

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