The main purpose of whole life insurance is to provide for loved ones when you die, but it can also deliver a host of investment and savings benefits.


Whole life policies cover you throughout your lifetime, unlike term policies, which only cover you for a specific amount of time. Each time you pay premiums, the guaranteed cash value within the policy grows on a tax-deferred basis. The cash can be withdrawn if you need to pay for big life expenses.


Costs of whole life insurance vs. term life insurance


Although a whole life insurance policy can cost up to 4 times as much as a term policy, it offers long-term financial benefits term policies can’t. Because term life insurance policies are not permanent, the death benefits expire at the end of the predetermined term. You can often renew the policy, but at a higher premium. Also, unless you have level premium term life insurance, term life insurance may be more inexpensive at the outset, but premiums can increase after a certain amount of time.


Financial benefits of whole life insurance


Whole life insurance is permanent, meaning as long as you pay the fixed premium regularly, your designated beneficiary will receive your death benefit. These funds should be sufficient to cover funeral and burial costs, as well as support the beneficiary for some time in the event of your unexpected death.


Premium rates are determined by your age and health; the younger and healthier you are, the more favorable policy terms will be.


Dividends


Whole life insurance doesn’t only deliver benefits when you die. Owners of a “participating policy” typically receive dividends, which are paid out annually over the whole life of the policy. Policies that are considered “non-participating” won’t pay out dividends.


Tax-free loans


Because a portion of your premium goes into a cash-value account, you can typically access the money in this reserve through a cash payment or by taking a policy loan. Withdrawing from the cash reserve does not mean ending the policy.  You may choose a cash reserve that accrues in addition to the death benefit or a cash reserve that becomes the death benefit. In the first few years of owning a policy, its cash value will usually be lower than the face amount. You also may have to wait up to 3 years before accessing money for a loan.


When borrowing from the whole life policy, the cash value of a policy is used as collateral and a pre-determined interest rate will be charged, but the loan won’t be taxed. Typically these loans have low interest rates. If you choose not to repay the loan, the loan amount would be subtracted from the death benefit. These loans can be used for pursuits such as paying off a mortgage, as capital for a small business, or for college tuition. Upon the death of the insured or the surrender of a policy, any outstanding loan amount will be deducted from the death benefit or from the cash value if cash was withdrawn.


Paying for estate taxes


You can also use a whole life insurance policy to set up a trust that will provide funds to pay estate taxes. These funds, much like a loan, are usually not taxed because the IRS generally does not consider death benefits to be taxable income.


Other investment benefits


A whole life insurance policy is overall a stable investment. The cash value is guaranteed by the insurance company and, unlike a traditional investment, is not subject to the ebbs and flows of the stock market. Because this kind of savings account growth is tax-deferred, funds will accumulate faster with a whole life insurance policy than with investments that are taxed annually.


Life insurance illustration via Shutterstock.