What is whole life insurance & how does it work?

Life is full of uncertainty. While you can't prepare for everything that may happen, you can plan for how your loved ones can replace your income and pay your final expenses when you're gone.

Whole life insurance can provide you and the people who depend on you with some financial security throughout your lifetime and after. On top of paying out a death benefit, it accumulates cash value you can tap into while you're alive, in case you face a major expense such as a home purchase or funding a child's college education.

If you're looking for guaranteed lifetime coverage and more flexibility, it may be worth a deeper look into how whole life insurance works. We'll cover:

• What is whole life insurance & how does it work?
• How much does whole life insurance cost?
• What are the top features of whole life insurance?
• Who benefits from whole life insurance?
• Deciding if whole life insurance is right for you

The most basic form of permanent life insurance, whole life insurance is guaranteed to last your whole life, as long as you pay the premiums. It combines a death benefit for your beneficiaries with a cash value component that you can access during your lifetime should you need it.

• The death benefit can help your beneficiaries make up for any lost income you would have earned, pay down debts and help your loved ones sustain the lifestyle they're accustomed to.
  
• The cash value component allows you to borrow against the policy tax-free should you need it for a financial need while you're living.

You can think of whole life insurance as a dual-function financial solution—it's a safety net as well as an investment-like asset that can help you build wealth over time.

The approval process typically requires you to go through medical underwriting, including a medical exam, that helps to determine your health status and risk to the insurer. Some insurers offer guaranteed coverage with no medical exam, but you may end up paying higher rates. In general, the healthier you are when you apply for life insurance, the lower your premiums will be.

The cost of whole life insurance will depend on how much life insurance you need, the type of whole life contract and the duration of your premium payments. Whole life insurance can seem much more expensive than other types of life insurance at the outset, but that's because of the consistent coverage and cash value it offers. You may even reach a point where your whole life premiums are fully paid.

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Whole life insurance is a popular type of coverage due to its collection of features:

As a provider for your family, it's understandable to put the financial well-being of your loved ones first. Whole life insurance can help achieve that goal, giving your beneficiaries—whether that's a spouse, child, aging parent or someone else—a potentially tax-free death benefit. When you're gone, the life insurance money can help them manage everyday expenses, pay off a mortgage or other loan, cover your funeral costs or go toward anything else they may need.

The bottom line: No matter how long you live, your whole life coverage is guaranteed and remains in effect as long as your premiums are paid.

Premiums never increase, so you won't be denied coverage or see your premiums go up if your health should worsen.

By contrast, if you have term insurance that expires, you typically have to undergo medical underwriting if you want more protection. Plus, your pricing can increase with term coverage since it's based on your age when you apply.

The bottom line: Premiums are guaranteed never to change, but the policy costs more than other types of life insurance.

• Explore more differences: Term vs whole life insurance: Everything you need to know

Whole life insurance allows you to build cash value that you can use during your lifetime. Cash value interest or earnings accumulate tax-free or tax-deferred.

The longer you have your life insurance, the more your cash value may grow. In addition to funding that cash balance with your premium payments, the insurer is crediting your account based on prevailing interest rates. In time, you could use your life insurance cash value to support things like family milestones, cover house maintenance or fund routine expenses if you lose your job.

The bottom line: Your cash value will grow income tax-deferred— even if interest rates change or markets decline.

Whole life insurance often earns dividends, or money an insurance company distributes to eligible policyholders and is based on company performance. Not every insurer or contract offers dividends. You can receive dividends in cash or use them to pay premiums, purchase additional insurance, add to the cash value and minimize loan payments borrowed against the contract.

The bottom line: Whole life policies generally pay dividends, but they are never guaranteed.

• Learn about Thrivent's record-breaking dividend payout in 2023

Once you build cash value, you have the ability to access that amount for a range of financial needs. Every life insurance contract has its own rules, but you typically can use your balance to:

• Make a withdrawal. This may be a good option if you face a large expense and need extra cash to minimize debt.

• Take out a loan.¹ When you take out a life insurance loan, you're essentially borrowing money from yourself. You typically pay interest on the loan that goes back to your cash value as well as a small spread that goes to the insurer.

• Pay premiums. You may be able to use your cash balance to pay the life insurance premiums. This gives you a way to keep your contract active if you experience a job loss or other strain on your budget.

• Surrender your life insurance.¹ You can choose to surrender your contract and receive a lump-sum payout. Keep in mind that your coverage will no longer be in effect if you do this. Some companies also assess charges if you surrender within the first few years.

The bottom line: Contract owners can borrow against cash value or use their contracts as collateral for personal loans. Note that any cash you take from your life insurance—including any loan amounts you don't repay—will reduce your balance and death benefit, leading to a smaller payout for your loved ones when you pass away.

You can tailor your whole life insurance contract based on the amount of coverage you need and your budget. In addition to choosing the amount of your death benefit, you also may have the ability to select different payment lengths. You may opt to spread premiums over your lifetime—thus lowering your monthly cost—or make larger payments for a shorter period of time. Once your premiums are "paid up," you no longer have to make payments to keep coverage and build cash value.

You also may be able to purchase optional add-on features, or riders, based on your coverage needs. For example, you could take out supplemental insurance that waives your premium if you become temporarily disabled. Or you may decide to buy a rider that provides term insurance on top of your whole life insurance during your family's most financially vulnerable years. Depending on the insurer, some riders may come standard. Others are optional and add to your premium amount.

Because the contract is active as long as you pay the premiums, whole life insurance may be a good fit for families seeking coverage that lasts longer than term life insurance. It also can serve as awealth-building asset for investors seeking insulation from the ups and downs of the stock market—or who simply want a lower-risk asset to balance out their traditional investment accounts. Whole life insurance also can benefit families who want to transfer wealth to the next generation.

Whole life insurance isn't solely for families, though. If you own a small business, a whole life contract that insures you or other key employees can be vital to the organization's long-term success. When you pass away, the payout from company-owned whole life insurance can help your team pay outstanding bills while they decide what to do going forward.

The decision to buy permanent life insurance or term coverage depends on your individual needs for your family or business. Because whole life is a form of permanent insurance, not term, you can expect the premiums to be higher than what you might pay for term coverage. But with the benefits it offers, it can be a valuable part of your financial strategy.

Thrivent financial advisors can help you evaluate your options—including comparing other kinds of insurance—and determine if whole life insurance is a good fit for you.