What Are the Benefits of Whole Life Insurance?

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

Most people start thinking about life insurance when someone else starts depending on their income. That makes sense; that’s what the death benefit is for.

But many policies—including whole life insurance—offer far more than a death benefit. In fact, while the purpose of whole life insurance is to pay a death benefit to your beneficiaries, the right policy can play an important role in your overall financial plan.

Read on for the key benefits and what they can do for you.

The key benefits of having a whole life insurance policy

1. Whole life insurance never expires

One of the defining benefits of a whole life insurance policy is this: As long as you pay your premiums, your death benefit will never expire. It’s guaranteed to be paid regardless of when you die, whether that’s tomorrow or 50 years from now.

It’s a key difference between whole life insurance and term life insurance, which pays a death benefit only if you pass away during the window of time that your policy covers.

2. Premiums on whole life policies stay the same

Every kind of insurance includes premiums, which are monthly payments to the insurance company to keep your policy active. Some types of insurance policies come with premiums that change over time. The premiums you pay for your whole life insurance policy, however, remain the same for as long as you have your policy.

3. Whole life insurance builds cash value

Cash value is an important “living” benefit of whole life insurance. A portion of each premium is added to your policy’s cash value, which accumulates more slowly at first, and accelerates as time goes on. You can access that value at any time for any reason.¹ Since the cash value is guaranteed not to go down from one year to the next, it can become an important, stable part of your financial plan.

4. Whole life policies can earn dividends

In addition to guaranteeing cash value growth, many life insurance companies pay dividends.² While you can take dividends as cash or use them to pay a portion or all of your premium, many people reinvest their dividends in their policies. That can allow your death benefit and cash value to accumulate even more quickly.

Whole life insurance has several key tax advantages

Here are some of whole life insurance’s tax advantages to consider:

• You can borrow against your cash value without paying taxes³—as long as the loans are repaid properly. For example, you might take out a life insurance loan to ride out a market downturn while you’re retired. If you repay the loan, you won’t incur taxes.
• The cash value growth and growth through dividends are both tax-deferred—you’ll owe tax on the growth if and when you surrender your policy and take out the money. The amount you paid in premiums can be withdrawn tax-free.
• You may be able to exchange a whole life insurance policy for another financial tool (such as an annuity or a long-term care policy). It’s called a “1035 exchange,” and it allows you to trade certain types of life insurance policies for similar financial tools—typically without incurring taxes.
• When you pass away, your beneficiaries typically receive the death benefit tax-free.

What are the living benefits of whole life insurance?

Several of the advantages of whole life insurance don’t have to do with the death benefit at all. They’re benefits you can use during your lifetime. For example, a policy’s cash value can help pay for college (while being excluded from financial aid determinations) or stabilize income in retirement. These “living benefits” can make a whole life insurance policy one of the most flexible parts of your financial plan.

What is a living benefit rider?

A rider is an added benefit to a life insurance policy that comes with an additional cost. If the main policy is the new car you’re purchasing, a rider is an optional upgrade, like leather seats or a high-end stereo.

For example, a living benefit rider may allow you to access your death benefit early—while you’re still alive—for specific reasons, like a qualified long-term care event. A rider known as a waiver of premium benefit lets you keep your policy active if you’re unable to pay your premiums for certain qualified reasons, such as if you become disabled and can’t work because an illness or injury. Your Northwestern Mutual financial advisor can explain more about specific riders you may want to consider.

What are the advantages of whole life insurance in retirement planning?

Many firms focus only on using investments to grow wealth and achieve financial goals in retirement. At Northwestern Mutual, we view the investing-only approach is a one-dimensional solution for a multi-dimensional challenge. Investments are important—they can provide long-term growth. But investments alone are less likely to help you achieve long-term financial security or stability than an approach that uses investments alongside other financial tools.

Research from EY, a professional services firm, shows that combining insurance and investments in your planning approach can leave you better off financially. According to EY’s analysis, when properly allocating your money across investments, permanent life insurance and deferred income annuities,⁴ you’re more likely to achieve better outcomes in retirement and leave a larger legacy than if you had relied on investments alone.

Find the best life insurance policy for you

When you’re comparing life insurance options, remember that you don’t need to choose between whole and other kinds of life insurance. Your financial plan can include multiple kinds of policies. This can give you more freedom to get ready for whatever life brings. Your Northwestern Mutual financial advisor can help you find the right mix of insurance and show you how it fits into your overall financial plan.

¹ Accessing your cash value will reduce your death benefit and may affect other aspects of your plan.

^*2 Dividends are not guaranteed.

³ Loans taken against a life insurance policy can have adverse effects if not managed properly. Policy loans and automatic premium loans, including any accrued interest, must be repaid in cash or from policy values upon policy termination or the death of the insured. Repayment of loans from policy values (other than death proceeds) can potentially trigger a significant tax liability and there may be little or no cash value remaining in the policy to pay the tax. If loans equal or exceed the cash value, the policy will terminate if additional cash payments are not made. Policyowners should consult with their tax advisors about the potential impact of their policy loans.

⁴ Income Annuity refers to a Deferred Income Annuity with increasing income potential, “which represents deferred income annuities with persistency bonuses and non-guaranteed dividends” referred to as “DIA with IIP” in the EY article.