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What you need to know about whole life insurance

Whole life insurance can be viewed as a blend between insurance and a savings or investment vehicle. But is it right for you? Read on for the details.

By Smart Spending Editor Jul 18, 2013 5:02PM
This post comes from Neda Jafarzadeh from partner site U.S. News & World Report.

MSN Money partnerMaking decisions about life insurance can be complicated for a number of reasons. On the one hand, it’s always difficult to think about the possibility of dying -- this psychological barrier to critically examining your insurance needs can be quite substantial for some people. On the other hand, you’re also faced with the additional challenge of comparing all the different types of life insurance products on the market today.

Image: Retired couple (© Photodisc Red/Getty Images)The first important decision you'll have to make when comparing types of life insurance is whether you’d like to opt for a term or whole life policy.

As the names of these policies indicate, a term policy is only meant to cover you for a certain period of time. Usually, this type of policy is purchased for a term of 20 to 30 years.

In contrast, a whole life policy is meant to protect you for the duration of your life. In addition, a whole life policy has what's known as a cash value. This means that some of the money you pay into the policy every month is saved or invested, so you're able to cash it out or borrow against it if you'd like.

Whole life insurance is often referred to as a hybrid product -- a blend between insurance and a savings or investment vehicle.

There are three basic types of whole life insurance:

1. Universal. Universal life insurance is the most basic type of whole life insurance, in which some of the premium paid by the purchaser goes toward a death benefit (to be used in the event that the purchaser dies) and some of the premium goes toward savings or a very safe investment.

2. Variable Life. Variable life insurance is more investment than insurance because most of the premium paid goes toward an investment in the insurance company's fund. This is considered a somewhat riskier insurance choice because death benefits can be impacted by investment returns. If you want a guaranteed death benefit, you'll have to pay more toward your premium.

3. Variable Universal. This type of whole life insurance is a blend between universal and variable life insurance. It offers a guaranteed death benefit in most cases, but the portion of the premium that's not going toward the death benefit can be invested as the purchaser sees fit (within the confines of the insurance company's investment choices). This makes it more flexible than typical universal policies, but safer than typical variable life policies.

So is whole life insurance right for you? As with nearly all financial products, there are benefits of this decision as well as some drawbacks.

Benefits of choosing whole life insurance:
  • Your beneficiaries are covered for the duration of your life, which makes some people more comfortable than the time limit placed on a term policy.
  •  If you or your beneficiaries don't file a claim, the money you paid into the policy every month isn't wasted -- it has a cash value you can draw on.
  • If you're a high-income individual who's maxed out your tax deferred investments, a variable or variable universal policy serves as an additional investment or savings vehicle.
Drawbacks of choosing whole life insurance:
  • Premiums are significantly more expensive than term insurance premiums.
  • Depending on your circumstances, you may not need life insurance for the rest of your days, meaning you could end up overspending on an unnecessary product.
  • Many insurance companies don't have the wide range of investment options that most people are looking for.
  • Picking the right type of life insurance is critical for you and your family, so be sure to do your research to carefully consider which will best serve your needs.

More from U.S. News & World Report:

Jul 18, 2013 8:19PM
Where was the article? You threw in 3 benefit bullets and 4 Drawback Bullets and no real in depth anything on anything. This was an article?  This is an embarrassment once again to MSN Money and US News and World. I don't even get why you wasted the space. 
Jul 18, 2013 10:03PM

WHole Life is not any of the three types you mentioned.

I can't believe you put this false info on the net.

Jul 18, 2013 8:38PM
This article is terrible.  Its all wrong
Jul 19, 2013 1:22AM
Owner of a life agency took the words out of my mouth. Universal life in any form can be permanent if designed correctly, but is not Whole Life in any sense. No idea where this info. came from.

Jul 18, 2013 11:10PM
whole life isn't any of the things listed. bullet bob needs to talk to a senior who just had a stroke and her term plan is going to expire in a few months and all the money she put in that plan is going to be lost forever and she doesn't know what she is going to do. bullet bob must not lose money when the market crashes so he should be worth several million dollars since he practices what he preaches.  
Jul 18, 2013 10:26PM
Very simple! Buy term and invest the difference into a basket of index funds and become self insured.

If your agent tells you anything different, fire him and get your term on-line..

Whole life is a big commission product for agents and companies.

I know their argument.... Term gets more expensive and you won't be able to afford life insurance when you are older.  One question to ask yourself. Would I rather have a ton of life insurance or $$$$$ in your investment?  

Jul 19, 2013 1:18AM
I agree with everyone but bulletbob. The three types of insurance are Term, Universal Life(with variations) and Whole Life(again with some different variations). As Just the facts stated, term can run out especially if you become uninsurable in the future. Each of the 3 kinds fit different situations during a person lifetime. Actually, using a combination of term and and I am going to combine the UL and WL into one category called Cash value or Permanent life insurance. Buy enough Permanent insurance that you will need for the rest of your life and term when your need is greatest, which is usually in your younger family life when you have kids at home, a mortgage and usually higher debt! The article didn't explain any of that. I could go on but I think you get the picture!
Jul 19, 2013 10:04AM

This author clearly did not consult with any life insurance agent or company when he wrote this.  Almost everything stated is incorrect! 


There are 2 basic types of insurance: term and permanent.  Term means for a specific amount of time and can be decreasing term, Yearly Renewal Term or for a specific time term 10, 20 or 30 year.  There are many types of permanent insurance: whole life, universal life, variable life, indexed,  2nd to die.  Each has different features, guarantees and purposes depending on your financial situation and risk tolerance. 


I hope this guy does some research next time!

Jul 19, 2013 1:31AM
And bulletbob, since you know all, what is the bigger money maker for insurance companies? Do you have any idea of what percentage of term policies actually pay out? So you pay in for x amount of years and the insurance companies don't pay out. And what is the only type of insurance(homeowners, health, auto, term life, etc. or whole life) guaranteed to pay out?

Jul 19, 2013 10:05PM
Discussing permanent life when writing an article on life insurance for the general public is one thing that has caused people to be so unsure about it that policy ownership is now at an all time low!.

There can be a place for Whole Life. With people who are  well-off, it can be a convenient option to insure a business partner or loan, bequeath a charity, pay estate taxes, or leave a legacy to heirs. These folks already have all the other investments.

But that is not most people. the typical profile of a term life insurance owner is someone who is a family breadwinner and has minimal savings. It is critical protection. If you are in this category and aren't insured, get insured now

Advantages of Term Life Insurance are: totally affordable, and ideal for younger families when the need for protection is greatest. Choose Term Life Insurance for covering specific needs that will disappear with time, such as: Income replacement, Financial security for dependents, Mortgage protection, College funding, Final/burial expenses.

To prepare you to speak with an agent, use an online quote engine to compare term life insurance prices. There is one at QualityTermLife where you can look at available rates from over on 50 top insurance companies. 
Aug 2, 2013 5:23PM
This article contains many flaws and just wrong information.. who edits this stuff??
Jul 19, 2013 2:47PM
Whole life insurance is the pay day lender of the middle class.   ~Dave Ramsey   
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