What Is Modified Whole Life Insurance?

Modified Whole Life Insurance DefinitionModified Whole Life Insurance Definition

Key Takeaways

  • With a modified whole life insurance policy, you will pay lower premiums upfront (for a predetermined number of years) and higher premiums on the back-end of the life of the policy.
  • Once your premium payments increase with modified whole life, they are generally higher than what you would expect to pay with a comparable whole life (fixed-rate) policy.
  • If you can’t afford the higher premiums once they increase, you run a higher risk of letting your modified whole life policy lapse and depriving your family of financial protection in the future.
  • Buying a modified whole life policy does not necessarily mean you will pay less in overall premiums than you would with a typical whole life policy for the same amount of coverage.
  • Delayed cash accumulation is one major drawback of a modified whole life policy that could end up costing you more money in the long run, especially if you decide to surrender the policy after a short period of time.

How Does Modified Whole Life Insurance Work?

Modified whole life insurance is a specific type of whole life insurance, but it does not share all of the exact same benefits of whole life insurance. The main feature of modified whole life insurance — also referred to as modified premium whole life insurance or graded life insurance — are lower premiums during the first several years of the policy. After this introductory period of time, your policy premiums increase and then remain at that higher amount for the duration of the policy.

Like typical whole life insurance, modified whole life insurance builds cash value, but it is delayed. Cash value accumulation only begins after your policy premium increases, which can vary in duration — usually between two and 10 years after the policy goes in force.

Modified whole life insurance policies have a 2-3 year waiting period. If the insured dies from natural causes during this time, beneficiaries receive only returned premiums plus interest, not the full death benefit. After the waiting period, the full death benefit is paid regardless of cause of death.

Modified whole life insurance requires little or no underwriting, so it appeals to people with serious health conditions who may not qualify for other policies. The following conditions may qualify for modified whole life insurance, depending on the insurer:

  • Cognitive memory disorders (including dementia and Alzheimer’s)
  • Kidney or liver failure
  • HIV / AIDS
  • Cancer
  • Supplemental oxygen usage
  • Confined to a wheelchair due to disease/illness
  • Living in a nursing home
  • Other terminally ill diseases

What Are the Differences Between Whole Life and Modified Whole Life Insurance?

The major differences (and similarities) between whole life and modified whole life insurance are summarized below. Keep in mind that modified whole life insurance also is different from limited pay whole life insurance - in which you pay premiums for a limited duration of time, after which point you no longer pay any premiums.

Whole Life Versus Modified Whole Life Insurance
Remain the same throughout the life of the policy Increase once (typically after 2-10 years, depending on the policy/carrier)
Cash Value Begins accumulating immediately (when the policy goes in force) Does not start accumulating until your premiums increase (typically after 2-10 years, depending on the policy/carrier) 
Waiting Period (after policy approval) Is none — full death benefit can be paid out immediately upon the death of the insured (once first premium is paid) May be two years or more (depending on the policy/carrier) — full death benefit can be paid only after a waiting period of two years or longer 
Underwriting  Is standard Is minimal or none 
Death Benefit Remains the same throughout the life of the policy Remains the same throughout the life of the policy 
Permanent Insurance Coverage Lasts for the entire lifetime of the insured Lasts for the entire lifetime of the insured 


Does Modified Whole Life Insurance Offer Cash Value?

Unlike whole life insurance, modified whole life delays cash value accumulation for 2-10 years after the policy starts, until premiums increase. This drawback means waiting up to a decade for cash value accrual, losing out on potential long-term gains. The initial lower premiums carry an opportunity cost, which means less cash value growth. So when considering modified whole life, you may need to weigh in your short and long term financial goals and current/future budgets to decide if it meets your needs.

What Is the Surrender Value in Modified Whole Life Insurance?

You can always decide to cancel any form of life insurance, whenever you want, for any reason, including modified whole life insurance policies. If you decide to cancel a modified whole life insurance policy, your insurance company will refund to you its net surrender value. It is typically an amount close to the total current cash value of the policy at the time you cancel it.

Remember, however, that cash value accumulation is delayed with a modified whole life policy. Consequently, you potentially could lose a significant amount of money depending on when you decide to cash in the policy. For example, if your premiums increase after three years with your modified whole life policy, you are just now beginning to build cash value. If you decide to cancel your policy after four years, you would have only one year’s cash value accumulation. By comparison, If you bought a traditional whole life policy instead and decided to cancel it after four years, you would have four years’ worth of cash value accumulation, which would be close to the surrender value you would receive when you cash it in.

What Are the Benefits of Modified Whole Life Insurance?

Modified whole life insurance policies feature a number of key benefits:

  • Minimal Underwriting — Many insurers require only a limited medical underwriting process (and sometimes none at all) for modified whole life insurance applicants. If you have any major health issues that could negatively affect getting approved for other types of life insurance, it may be easier for you to apply for modified whole life.
  • Reduced Upfront Costs — With modified whole life Insurance, you will pay a lower premium for the first several years of the policy. If you foresee your income increasing in the future, this kind of insurance may be a good choice for you.
  • Set Death Benefit — Whether you purchase an ordinary whole life insurance policy or a modified whole life insurance policy, the death benefit for both types of policies remains the same for the entire life of the policy.
  • Guaranteed Coverage for Your Entire Life — Modified whole life insurance provides the same kind of permanent insurance coverage as whole life. As long as you pay your premiums to keep the policy in force, your coverage will last the duration of your lifetime.
  • Tax-Deferred Cash Value Accumulation — Although it is delayed, building cash value on a tax-deferred basis is still an attractive feature of modified whole life insurance. This accumulated cash value can be quite beneficial if and when you want to surrender the policy, withdraw money or take out a loan.

What Are the Potential Drawbacks of Modified Whole Life Insurance?

In addition to its benefits, modified whole life insurance carries with it a series of potential drawbacks as well:

  • Increase in Premiums — People who buy this kind of insurance need to be prepared to pay higher premiums after the first several years of the policy. If you are looking for level premiums for the duration of your life insurance contract or the most affordable rates, modified whole life may not be the most suitable choice.
  • More Complex Contract — Since premiums increase once during the life of a modified whole life insurance policy, the contract involves a more complicated premium payment structure than ordinary whole life.
  • Waiting Period — Some modified whole life insurance policies have a two- or three-year waiting period before the insurer will pay out the death benefit for a non-accidental death. If the insured dies before the end of this waiting period, the insurer may typically return any premium payments with a predetermined amount of interest. Once this waiting period ends, the beneficiary will receive the full death benefit upon the death of the insured individual, no matter the cause of death.
  • Delayed Cash Value Accumulation — With ordinary whole life policies, you begin building cash value immediately. However, with a modified whole life policy, cash value accumulation generally does not begin until after your premiums increase, which can be anywhere between two and 10 years after the policy goes in force.
  • Total Policy Expense — Even though you will pay less in premiums at the beginning, the increase in premiums down the road with modified whole life insurance may make this type of policy more expensive in the long run.

How Much Does Modified Whole Life Insurance Cost?

When you consider the entire life of the policy, a modified whole life insurance policy is not necessarily less expensive than a typical whole life insurance policy. The premiums you pay during the “modified-premium period” are lower, but they are not discounted because you will end up making up the difference (and possibly paying even more) when you start making the higher premium payments after the initial period ends.

Here are some average whole life insurance costs for a $250,000 policy:1

 Average Monthly Whole Life Insurance Premium Costs for a $250,000 Policy
 30  $201 $180 
 40  $293 $262 
 50  $445 $387 


Based on these average costs, a healthy non-smoking 30-year-old male would pay about $201 per month for a $250,000 whole life insurance policy. If this were a modified whole life policy, however, this insured male could expect to pay less than $201 per month for the first several years, but then after this initial period, he could anticipate paying even more than $201 per month for possibly decades after that. For comparison, that same 30-year-old insured male could purchase a $250,000, 20-year term life insurance policy for an average cost of about $13 per month.1 As illustrated by these examples, whole life can cost 15 times as much as term life insurance, and a modified whole life policy may cost you even more than that over time.

Who Should Buy a Modified Whole Life Insurance Policy?

Modified whole life insurance may seem like an attractive choice because it involves lower premium payments at the beginning, but you may be better off considering either a term life policy (which is generally cheaper than a whole life policy for the same amount of coverage) or a whole life policy with a lower death benefit amount.

If you are looking for permanent life insurance with a relatively high death benefit and you expect to earn a higher income in the future that would make paying the higher premiums at a later date seem affordable, then modified whole life insurance may be a good choice for your life situation. In addition, those with serious health conditions — such as cancer, dementia, kidney failure or AIDS — who would not qualify for other types of life insurance may find modified whole life to be their most viable option.

Regardless of your personal situation, it may be helpful for you to consult with a knowledgeable financial representative to better understand the specific details of all your life insurance options so you can choose the policy that best meets your current financial needs at an affordable price within your budget.

Withdrawals may be subject to charges, withdrawals of taxable amounts are subject to ordinary income tax, and, if taken before age 59½, may be subject to a 10% IRS penalty. Interest is charged on loans, they may generate an income tax liability, reduce the Account Value and the Death Benefit, and may cause the policy to lapse.

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  1. Forbes Advisor: Average Cost of Life Insurance In November 2023. https://www.forbes.com/advisor/life-insurance/how-much-is-life-insurance/.

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