Whole life insurance gives you lifetime coverage at a premium rate that does not increase with your age after you buy. In the early years of the policy, when you're a low risk, you'll pay more in annual premiums than it costs to insure you.
As you become a higher risk at an older age, the level premium eventually becomes less than the amount it takes to insure you. Level premium payments build a reserve in your policy that is used to insure you as you age. Insurance companies call this reserve the "cash value."
Click here for more about the different types of whole life insurance and the different ways to pay the premiums.
Here's some information from consumer organizations and state departments of insurance.
Whole Life Insurance
Whole life is a type of life insurance that builds a "cash value". The first 2-4 years you pay your premium, none goes into your cash value. The fees and expenses of the policy take that portion of your premium. After the 2-4 years pass, you begin to accumulate a cash value. If you want your money out of your cash value, you borrow it, typically at 6%-8% interest rate. Which, you pay the interest to the COMPANY, not back to yourself! Not only that, but when you die, the company will KEEP your cash value. Assume you have $2,000 of cash value, and your death benefit (insurance coverage) is $50,000. Your beneficiary only gets the $50,000 -- the insurance company keeps YOUR $2000 of cash value. The idea behind whole life, is that at the age of 100 you'll accumulate in your cash value your death benefit amount. So, up until that point, the insurance company takes the difference of your death benefit amount and your cash value, and they pay the difference. By the way, if you borrowed your $2,000 and then died, your beneficiary would only get $48,000!!! Look in your policy. There is a table which projects your cash value amounts throughout the years of your policy. One column says what your death benefit is. Notice how that stays level, even as your cash value goes up. It's because the cash value is NEVER REALLY YOURS!!! Your beneficiary will only get your coverage amount, NEVER the coverage amount PLUS the cash value!!!
Note that whole life policies are designed to mature at age 100. The assumption is that you will not live that lon g but if you do your premiums are considered paid in full and and the cash value in the account has reached the face value of the policy. Insurance companies at this point will issue checks for the full value and the contract is considered completed.
A type of permanent life insurance, whole life insurance is applicable for a lifetime. Generally the life insurance premiums remain fixed for the entire span of the policy, and are therefore on the higher side. With a cash value component, this type of policy has investment benefits for the insurer, which can be made accessible through policy loans or surrenders.
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