What Is Whole Life Insurance, and How Does It Work?

Permanent life insurance is a general term used to refer to various forms of life insurance policies that build cash value and remain in effect for the entire life of the insured (or until age 100) as long as the premium is paid. The most common type of permanent insurance is whole life.

Whole life policies also build cash value (living benefits), which the policyowner can borrow against, or to which he or she is entitled, in the event the policy is surrendered. The cash value, called nonforfeiture value, does not usually accumulate until the third policy year and it grows tax deferred. The policyowner may also borrow against the cash value of a whole life policy. However, the amount of any outstanding loan and interest will be deducted from the policy face amount upon the insured’s death. Additionally, the insurer may defer payment of any loan request for up to 6 months.

The following are key characteristics of whole life insurance.

• Level premium — the premium for whole life policies is based on the issue age; therefore, it remains the same throughout the life of the policy.
• Death benefit — the death benefit is guaranteed and also remains level for life.
• Cash value — the cash value, created by the accumulation of premium, is scheduled to equal the face amount of the policy when the insured reaches age 100 (the policy maturity date), and is paid out to the policyowner. (Remember: the insured and the policyowner do not have to be the same person.) Cash values are credited to the policy on a regular basis and have a guaranteed interest rate.
• Living benefits — the policyowner can borrow against the cash value while the policy is in effect, or can receive the cash value when the policy is surrendered. The cash value, also called nonforfeiture value, does not usually accumulate until the third policy year and it grows tax deferred.