Advantages & Disadvantages of Whole Life Insurance Policies

by Gregory Hamel
Whole life insurance does not have an expiration date.

Life insurance is a financial tool that can help ensure your family has the financial means to get by if you die. When you buy life insurance, you pay a monthly fee called a premium in exchange for the guarantee that the insurance company will give compensation to your loved ones after you die. Whole life insurance is a type of coverage that persists for your entire life instead of a fixed term.

Permanent Coverage

Whole life insurance lasts as long as you keep paying your monthly premiums. This means you can keep the same policy for your entire life as long as you faithfully make payments. Your loved ones, then, are guaranteed to receive a benefit when you die. By contrast, term life insurance policies last for fixed periods of time, such as 10, 15 or 20 years; if you live beyond the term, you get no benefit.

Cash Value

When you buy whole life insurance, a portion of your premiums go into a savings program that allows the account to accumulate a cash value. The savings grows on tax deferred-basis, and you can tap into the funds during retirement or leave the funds in the account so they pass on to your heirs after you die. Term life insurance has no savings component, so the death benefit of term insurance doesn't increase over time.

Cost

The main disadvantage of whole life insurance is that premiums can be expensive, especially in the short term. Because whole life coverage doesn't expire and includes a savings component, insurance companies typically have to charge more for whole life coverage than term coverage. Term life insurance tends to be inexpensive for younger workers who aren't likely to die before the end of their insurance coverage term. Term coverage, though, can be expensive to renew later in life, while the premiums of whole life coverage stay the same.

Complexity

Whole life insurance policies are more complex than term policies, which can make it more difficult to compare different whole life insurance plans. Advertisements for whole life policies might be based on high expectations of dividends, but a plan’s dividends and costs can change over time and might not meet expectations. Term life insurance is straightforward; you pay a fixed premium and get a fixed benefit if you die during the coverage term.

About the Author

Gregory Hamel has been a writer since September 2008 and has also authored three novels. He has a Bachelor of Arts in economics from St. Olaf College. Hamel maintains a blog focused on massive open online courses and computer programming.

Photo Credits

  • Jupiterimages/BananaStock/Getty Images