Whole life insurance (also referred to as permanent life insurance) refers to life insurance policies that are meant to last until death and have an investment aspect. As long as the person pays the required premiums, the insurance policy will provide a death benefit when the person dies in contrast with term life insurance which only covers a specific amount of years. The premiums for a whole life insurance policy go towards the guaranteed death benefit and an investment account. The investment part of the premiums can build value overtime with many policies including a guaranteed return rate. The policy holder can take money from the cash value of the investment account during their lifetime, but this can reduce the death benefit for the beneficiaries. Also, the policyholder may be able to take a loan against the policy, or ‘surrender’ the policy for its entire cash value minus any obligations, which ends the policy coverage. Depending on the terms of the policy, the cash value of the policy may either go to the beneficiaries or the insurance company when the policy holder dies. Whole life insurance, given its lifelong death benefit guarantee, can be expensive compared to other policies.
There are important tax considerations for whole life insurance policies. The investment part of the policy builds value tax-free until withdrawal like retirement accounts, and similarly, any value that is withdrawn greater than that paid into the policy will be taxed. Individuals may exchange their current policy for another or for qualified investment alternatives, but they must follow specific tax guidelines to avoid being taxed in between the exchange.
[Last updated in April of 2022 by the Wex Definitions Team]