Define: Whole Life Insurance

Whole life insurance is a form of life insurance that remains in effect until the insured person passes away. As long as the individual continues to pay the required premiums, the insurance policy will provide a death benefit upon their death. The premiums are divided between a guaranteed death benefit and an investment account. Over time, the investment portion of the premiums can accumulate value. The policyholder has the option to withdraw funds from the investment account during their lifetime, but this may result in a reduction of the death benefit for their beneficiaries. It is important to note that whole life insurance tends to be more costly compared to other types of policies. Additionally, there are significant tax considerations associated with whole life insurance policies. The investment portion of the policy grows in value without being subject to taxes until it is withdrawn, similar to retirement accounts. However, any amount withdrawn that exceeds the total amount paid into the policy will be subject to taxation.

Whole life insurance, also referred to as permanent life insurance, is a form of life insurance that provides coverage for the entirety of the policyholder’s life. As long as the policyholder continues to pay the required premiums, the policy will grant a death benefit to the beneficiaries upon the policyholder’s death. Unlike term life insurance, which only offers coverage for a specific period, whole life insurance policies are designed to last until the policyholder passes away. In addition to the death benefit, these policies also include an investment component. The premiums paid by the policyholder contribute towards both the death benefit and an investment account. Over time, the investment portion of the premiums can accumulate value, often with a guaranteed return rate. The policyholder can also withdraw funds from the cash value of the investment account during their lifetime, but this will decrease the death benefit for the beneficiaries. For instance, if John has a whole life insurance policy with a $100,000 death benefit and a $50,000 cash value, withdrawing $10,000 from the cash value would reduce the death benefit to $90,000. While whole life insurance policies can be more costly compared to other types of life insurance, they offer a guarantee of lifelong death benefit. Upon the policyholder’s death, the cash value of the policy may be distributed to either the beneficiaries or the insurance company, depending on the policy terms. It is important to consider the tax implications of whole life insurance policies. The investment portion of the policy grows tax-free until withdrawal, and any value withdrawn beyond the amount paid into the policy will be subject to taxation. Individuals also have the option to exchange their current policy for another or for qualified investment alternatives, but they must adhere to specific tax guidelines to avoid being taxed during the exchange process.

This site contains general legal information but does not constitute professional legal advice for your particular situation. Persuing this glossary does not create an attorney-client or legal adviser relationship. If you have specific questions, please consult a qualified attorney licensed in your jurisdiction.

This glossary post was last updated: 17th April 2024.