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Make a PaymentWhat is a whole life insurance policy and how does it work?
Whole life insurance is the most common type of permanent coverage. Unlike a term life insurance policy—which expires after a specified period, such as 20 or 30 years—a whole life insurance policy can last until age 100.
Whole life insurance policies are typically more expensive than term policies, but they come with fixed premiums that don’t rise over time. Like other permanent life insurance, whole life insurance has a significant upside. In addition to providing financial protection for your loved ones, it also contains a cash value component that grows over time.
Like any other life insurance plan, you will need to pay premiums. Those premiums get divvied up to fund:
Financial Protection for Your Beneficiaries
When you pass away, your beneficiaries will typically get a tax-free, lump-sum payment called a death benefit.
The Policy’s Cash Value
The cash component is like a savings account that grows tax-deferred at a guaranteed interest rate to supplement your retirement income. You can take out a loan or withdraw funds from your life insurance policy’s accumulated cash value. Withdrawals are tax-free as long as the withdrawal amount doesn’t exceed your total premiums paid.
Depending on the policy, withdrawing too much from the accumulated cash value might reduce—or cancel out—the death benefit that your loved ones would receive. So make sure that you understand how your whole life policy works.
Benefits of a Whole Life Insurance Policy
Whole life insurance offers:
- Lifetime coverage: As a permanent life insurance policy, whole life can last until the age 100.
- A guaranteed death benefit: When you die, your beneficiaries receive a guaranteed cash payout.
- Cash value: Your policy’s accumulated cash value grows at a fixed rate on a tax-deferred basis.
- Fixed premiums: Premiums never go up as long as you pay them on time. At age 100, you stop paying premiums.
AAA Whole Life Insurance Quote
Whether you’ve already chosen a policy or are still exploring, AAA makes it easy to get a quote or get in touch if you have questions.
Why Choose AAA?
- Competitive, personalized rates to meet your budget and needs
- Easy claims process for your loved ones
- AAA Members receive a 10% discount on term policies
- Excellent customer service from knowledgeable life insurance agents
Frequently Asked Questions: Whole Life Insurance
The life insurance policy that works best for you depends on your budget and needs. If you want to keep your life insurance cost lower and need coverage for just 20 or 30 years, term life insurance may be a good choice. If you want lifelong coverage and hope to supplement your retirement savings, you may want to consider a whole life insurance policy, which includes a cash value component.
As a rule of thumb, your whole life insurance policy should equal at least five times your annual salary, plus any education expenses that you want to cover for your beneficiaries. Ultimately though, the best coverage amount for you depends on your loved ones’ future expenses after you’re gone.
Your beneficiaries may need enough money to cover costs like mortgage payments, personal debts, living and education expenses, as well as end-of-life expenses such as funeral costs, so you’ll want to make sure that the policy’s death benefit is sufficient.
Your insurance agent can review your finances with you to help you arrive at a number that ensures that your family gets the financial support they need after you pass.
It may be best to buy a policy when you’re younger and whole life insurance rates are lowest. Whole life premiums are fixed, so once you have a policy, your premiums won’t go up as you age. Plus, the cash value will have more time to grow the sooner you purchase a policy.
Most whole life insurance policies allow you to stop paying premiums at age 100.
Yes, you can often cash out a whole life insurance policy. You can access the cash value by:
- Taking out a loan: You can borrow money against your cash value balance, usually at a low loan interest rate. This is a great option if you need quick cash and want to preserve your life coverage.
- Withdrawing money: If you’ve had your life policy for some time and its cash value has grown, you can withdraw money from its cash value. This is a handy option if you need to pay a big, unexpected expense.
- Canceling your policy: You can cancel your whole life insurance policy and receive its cash surrender value. The cash surrender value is the amount of cash that has accrued minus any policy cancellation charges or fees. Depending on the policy, you’ll receive the cash surrender value in a lump payment or a series of payments over time.
It depends on factors like your premiums and the interest rate, but it generally takes five to 10 years for cash value to begin accruing.
Whole life insurance costs will vary depending on factors like:
- Age: The older you are, the higher your premium payments will be. With each birthday you celebrate, life insurance premiums rise around five to eight percent (and more once you enter your fifties).
- Medical history: If you have certain preexisting health conditions, you’ll have higher premium payments than someone your age who doesn’t.
- Lifestyle: You’ll typically pay more if you smoke, have a risky job or hobbies, or have a checkered driving record.
- Gender: Women tend to live longer, so their life insurance rates are usually lower than men of the same age.
- Policy’s coverage amount: A $1 million policy will generally cost more than a $500,000 policy.
In general, life insurance premiums are based primarily on life expectancy. The younger and healthier you are, the cheaper your premiums will be.
While it varies by carrier, policy, and coverage amount, most whole life insurance policies require a medical exam similar to your annual checkup. Depending on your insurance company, your medical exam may include bloodwork or certain tests such as a treadmill stress test. You may also be asked about the medications you take, so have a list of them with you. Some life insurers sell whole life policies that don’t require a medical exam. These policies usually have a smaller death benefit.