What Are the Types of Whole Life Insurance?

Reviewed by W&S Financial Review Board
Types of Whole Life InsuranceTypes of Whole Life Insurance

Key Takeaways

  • Whole life insurance offers lifelong coverage, a guaranteed death benefit, and a tax-deferred cash value usable for loans or policy enhancement.
  • Participating whole life insurance pays dividends, while non-participating policies do not but still guarantee benefits..
  • Whole life policies offer flexible premium options like level, single, and limited payment plans to fit diverse financial needs.
  • Specialized whole life insurance options include final expense insurance for end-of-life costs and survivorship insurance for couples, useful in estate planning.
  • No-Exam offers quick, exam-free approval with permanent coverage and cash value, though premiums may be higher due to increased risk.

Considering whole life insurance but feeling a bit overwhelmed by your choices? You're not alone. It's a big decision. Learning more about the different types of whole life insurance, including the features and benefits of each, can help point you toward the coverage that addresses your needs.

Whether you're helping safeguard your family's future, estate planning to help secure your legacy or simply wanting greater financial confidence, you have options. Here are some of the various whole life insurance policies to help in choosing a course of action for you and your loved ones.

Whole Life Insurance: Understanding the Different Types

Life insurance falls under two primary types of coverage: term life and whole life. Term life insurance protects for only a specified period, Whole life insurance, on the other hand, lasts your entire life (as long as premiums are paid).

Whole life insurance has some unique benefits. It provides a measure of financial protection to your loved ones with a death benefit, which is generally received tax-free. It can also build tax-deferred savings through a cash value component, which may grow over time.

Each type of whole life insurance offers features that may serve specific needs, such as long-term financial security or estate planning. Exploring the options helps you make an informed choice. That in turn can help make sure your life insurance policy strikes the right balance of security, growth potential and flexibility for your needs.

Participating Whole Life Insurance

Participating whole life insurance is a type of permanent life insurance policy that provides a death benefit as well as an investment component to potentially grow cash value. As is true of other types of whole life policies, coverage doesn't expire.1 A death benefit is guaranteed provided premiums are paid.

A portion of your premium payments are set aside in a cash value account. The value of the account can grow over time, typically at an interest rate set by the insurer. The cash value grows tax-deferred. You may borrow against it, although doing so may reduce the death benefit.

A unique feature of a participating policy is that it earns dividends. These are typically a share of the insurer's profits based on its operating performance and are paid directly to the policyholders. Dividends aren't guaranteed. But if you do receive them, you can choose how to use them. Your choices may range from taking them as cash or using them to reduce premiums to adding them to your cash value account to accumulate interest.

Dividend-paying whole life insurance is an option for those seeking long-term financial security through a guaranteed death benefit accompanied by a cash value component that may earn dividends. It's also an estate planning tool that can help preserve wealth by creating a legacy for the next generation.

Non-Participating Whole Life Insurance

The biggest difference between a participating life insurance policy and nonparticipating whole life insurance coverage comes down to dividends. A nonparticipating policy lasts for your entire life1 with a guaranteed death benefit paid to your loved ones. It also offers a cash value component to earn tax-deferred growth.

However, as the name suggests, a nonparticipating plan doesn't participate in receiving dividends tied to the life insurance company's operating performance. In this case, the insurer retains any profits instead of passing them on to policyowners. For this reason, nonparticipating life insurance policies are typically more affordable than those that offer the potential for dividend payouts.

As with many other types of permanent life insurance, non-dividend paying whole life insurance policies tend to have fixed premiums. That means they don't change over the life of the policy. The cash value accumulates at a guaranteed interest rate set by the insurer. You may be able to borrow against or even withdraw funds from it, though again that could reduce your death benefit.

This type of coverage offers policyholders guaranteed death benefits and tax-deferred growth at a lower rate than more complex policies. It can provide a way to get life insurance protection that's more straightforward and predictable.

Level Premium Whole Life Insurance

When budgeting for a life insurance policy, premium payments may play a role. It can be difficult to plan for costs if the premiums change over time. With level premium whole life insurance, the premium is fixed throughout the life of the contract.

For some, that can ease worries about potential changes in health, age or income. The policy is permanent, lasting your entire life1. A death benefit is guaranteed (as long as premiums are paid) that may grow over time if the cash value grows and is reinvested.

As with other types of whole life insurance, level premium coverage allows for cash value accumulation. The policy's cash value can grow tax-deferred over time and may be borrowed or withdrawn against. However, that may reduce the policy's death benefit and is subject to the policy's terms.

A level premium policy can provide long-term security, more simplicity and greater stability while building cash value and making budgeting easier. It's more predictable protection that can help you know exactly how much it will cost every year.

Single Premium Whole Life Insurance

Single premium whole life insurance is a unique type of permanent life insurance coverage thanks to its distinct payment structure. To get coverage, you pay a single large lump sum payment upfront, instead of ongoing monthly or yearly premiums. Once you've paid the premium, the policy and the cash value are funded for the rest of your life with a guaranteed death benefit.

Because you've paid for the entire policy upfront, you start with immediate cash value. There's still the potential for it to grow at a set interest rate over time, which you may be able to withdraw from or borrow against. But understand, doing so may impact your death benefit.

This type of life insurance is structured differently than others and is termed a modified endowment contract (MEC). For that reason the Internal Revenue Service (IRS) has more strict tax rules around it.2 As such, any withdrawals or loans taken before age 59½ could result in substantial tax penalties. Withdrawals are also treated as earnings coming out first, which are taxable as ordinary income.

Single premium converge is not for everyone. It's often used for estate planning purposes, with asset relocations or tax-advantaged wealth transfers in mind. A financial professional can help determine if it addresses your situation.

10-Pay Whole Life Insurance

Another type of permanent policy with a unique payment structure is 10-pay whole life insurance. With this coverage, you pay premiums for 10 years. Thereafter, you don't need to continue paying. But the protection remains in force for the rest of the policyholder's lifetime, subject to the policy's maturity provision.

Generally, you'll pay about the same amount in total premiums with a 10-pay life as you would for other types of permanent life insurance, but the premiums will be more expensive. That's because you're paying the total amount in a shorter period. As such, you'll need to make sure you have the funds to afford the larger payments — if you miss one, your policy could be canceled.

In terms of benefits, 10-pay coverage is similar to traditional whole life insurance; it lasts your entire life, has a guaranteed death benefit and can accumulate cash value with tax-deferred growth over time.

This policy may be attractive to those willing to pay higher premiums over a shorter period, so they don't have to be concerned with budgeting for the long term. Plus, since the premiums are paid off earlier, the policy is fully funded sooner and thus has the potential to accumulate more cash value over time.

Limited Payment Whole Life Insurance

Limited payment whole life insurance is a type of life insurance where premiums are paid for limited periods, but the coverage lasts for the policyholder's entire life, subject to maturity provisions. 10-pay life insurance is one example. Single-pay is another. However, you could find payment terms for seven, 15 or 20 years or until the policyholder reaches a specific age, such as 65.

The key features of limited payment whole life are similar to other permanent coverage policies. You'll have guaranteed coverage with a death benefit payout as long as premiums are paid. The cash value component can grow tax-deferred, and you may be able to access those funds for loans or withdrawals, depending on the policy terms.

As with 10-pay life insurance, premiums for limited payment policies tend to be more expensive. Again, you'll generally pay roughly the same amount as you would for a traditional policy. Additionally, some limited-pay policies pay dividends, which you can use to help pay your premium or put toward growing cash value.

Limited pay policies may appeal to those who have the funds to pay higher premiums for shorter periods and want to gain some of the benefits of faster cash value accumulation.

Interest-Sensitive Whole Life Insurance

Interest-sensitive whole life insurance is a permanent policy that offers whole life coverage, flexible premiums and death benefits. What distinguishes it is a cash value component tied to prevailing interest rates. This policy stands out from traditional whole life coverage because cash value isn't guaranteed at a set interest rate.

Interest rates for this life insurance policy are tied to an external index, such as the S&P 500. Because of this, interest crediting will vary over time; rates aren't fixed by the insurer. Growth will fluctuate based on market performance, so while you may see higher potential returns, there's investment risk as well.

As another dividend-paying whole life insurance policy, interest-sensitive coverage may pay out dividends. You can apply these payments to your premiums, take them as cash or even add them to your cash value account. However, payments may vary based on the investment markets. You may not receive a dividend at all.

Interest-sensitive whole life insurance may be considered by buyers who want flexibility in premium payments and death benefits (within certain limits) for long-term financial planning, but who also have a higher risk tolerance for investing.

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Indexed Whole Life Insurance

Indexed whole life insurance has many of the benefits of a traditional permanent insurance policy, such as a guaranteed death benefit, fixed premiums and a tax-advantaged cash value component.

It also has an investment component linking the cash value's growth to performance tied to a stock market index, such as the S&P 500. So although the policy's investment returns are tied to what's happening in the market, its cash value isn't directly invested in it. Insurers also typically set minimum and maximum rates for cash value earnings. That way, when the market underperforms, your cash value won't grow less than a set base rate.

Unlike indexed universal life insurance, this coverage doesn't allow changes to your death benefit or premiums based on your cash value. Premiums are fixed on a universal life policy. Your death benefit may grow due to cash value performance.

An indexed whole life insurance policy seeks to combine some of the stability and predictability characteristics of traditional whole life insurance with measures of lower-risk growth potential and downside protection.

Modified Whole Life Insurance

Modified whole life insurance is another permanent policy with a unique premium payment structure. With this coverage, the insured person will pay a lower premium over the first few years, which then will increase after the introductory period.

The lower premiums typically last between two and three years but may extend longer. The higher premiums will be in effect for the rest of your life. As long as you continue making payments, you'll have coverage and guaranteed death benefit protection.

The cash value component is also slightly different with modified whole life insurance. With most contracts, your premiums won't contribute to your cash value account until the introductory period ends. So depending on your policy, that may be a few years or upward of a decade, which inturn can impact savings growth.

This type of policy isn't a fit for everyone. However, it does provide some budgeting flexibility over the first few years with initial lower premiums. That aspect may appeal to those who want whole life coverage and expect their finances to improve over time.

Variable Whole Life Insurance

Variable whole life insurance has many of the same features as a traditional whole life policy, such as lifelong coverage that's in effect as long as the premiums get paid and a cash value component.

However, it also has some unique features that set it apart from other types of whole life insurance. The primary difference comes from the cash value component, which is tied to investment options chosen by the policyholder. Additionally, some policies offer flexible premium payments and death benefit amounts.

Unlike some other policies, the cash value isn't guaranteed. It varies based on the performance of your investments. If the market performs well, you may see significant cash value growth; however, if the investments perform poorly, your cash value can decrease. That in turn may impact your death benefit, though insurers typically set a guaranteed minimum payout.

Variable life insurance is a higher-risk form of protection since you risk losing money if your investments don't perform well. This coverage may also need a more hands-on approach, so you may want to discuss it in detail with a financial professional.

Final Expense Whole Life Insurance

Final expense whole life insurance is designed to cover end-of-life expenses, such as funeral and burial costs, outstanding medical bills and legal costs. Final expense insurance is permanent. As long as the premiums are paid, it will last the rest of your life.

in addition, for this coverage you won't need a life insurance medical exam. For those with health challenges who struggle to qualify for other types of coverage, final expense whole life insurance may be a more affordable path to permanent protection with a death benefit and a fixed premium.

Unlike many traditional whole life policies, the death benefit payouts for final expense coverage are limited. They usually range from a few thousand dollars up to $50,000. Final expenses can often add up: The national median cost in 2023 for a funeral with casket and burial was $8,300 and was approximately $6,280 for a funeral with cremation.3

This type of coverage is intended to help cover those end-of-life costs rather than provide long-term financial support. As such, it's typically a more affordable option for those wanting to leave some funds behind to help pay for expenses.

Survivorship Whole Life Insurance

Survivorship whole life insurance is a joint life insurance policy that covers two people, usually a married couple, under one contract. Applicants apply for coverage at the same time, and the death benefit is held until both parties die. It's also called second-to-die life insurance.

What makes this policy unique is that when the first person insured dies, the surviving spouse doesn't get the death benefit. Instead, they'll continue to pay premiums until they pass. It's at that point that the death benefit then pays out to beneficiaries.

As with other types of permanent life insurance, survivorship life insurance provides a guaranteed death benefit, fixed premiums and a cash value component that can grow tax-deferred.

Survivorship coverage is a unique policy that can appeal to some higher-net-worth couples as an estate planning tool. It helps guarantee a legacy for loved ones or a charity or organization close to your heart while providing tax benefits for the beneficiaries.

No-Exam Whole Life Insurance

Many life insurance policies require a medical exam as part of the approval process. The exam is generally quick and similar to an annual physical. It's part of the underwriting process that assesses risk which in turn determines the cost of the coverage.

However, some people don't like participating in medical examinations. For this reason, and for those who are older, have poor health issues or face illness or disease, they may get rejected from coverage or face very high premium rates.

No-exam whole life insurance doesn't require a medical exam and often has a quick approval process. That may make it an option that can better address immediate needs. It provides coverage for life, as long as premiums are paid, and some may offer a cash value component.

While no-exam life insurance is a fast and convenient way to get guaranteed coverage, you may face higher premium costs due to the increased risk to the insurer. Moreover, the amount of the coverage you're able to obtain may be less than if you were to buy fully underwritten protection.

Find the Right Coverage for Your Needs

When it comes to whole life insurance, there are many options. That means there's likely a policy out there for your unique needs and goals. The choice you make depends on what's most important to you — budget, financial security or growth potential, to name a few.

If you need more guidance, consider sitting down with a financial professional. They can help tailor a financial strategy to your specific situation and needs, which can help you pick the coverage that aligns with your financial goals.

   Help secure your legacy today and find the whole life insurance policy for your needs. Get a Life Insurance Quote  

Footnotes and Sources

  1. Policies may be subject to maturity provisions.
  2. Internal Revenue Service. (2001). Revenue Procedure 2001-42. https://www.irs.gov/pub/irs-drop/rp-01-42.pdf.
  3. 2023 NFDA General Price List Study Shows Inflation Increasing Faster Than the Cost of a Funeral. https://nfda.org/news/media-center/nfda-news-releases/id/8134/2023-nfda-general-price-list-study-shows-inflation-increasing-faster-than-the-cost-of-a-funeral.

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