What Are the Benefits of Whole Life Insurance?

Sean McGinn is an assistant director of Product Positioning in the Insurance Solutions department at Northwestern Mutual.

Whether you’re starting a family or getting married, people usually start to think about life insurance when someone else starts to depend on their income. And that’s great, because that’s exactly what the death benefit is for.

As you learn more about life insurance, you’re likely to find that many policies—like whole life insurance—have more than just a death benefit. In fact, while life insurance is primarily about a death benefit for the people who depend on you, it can also become an important part of a financial plan through the living benefits of whole life insurance.

Here we’ll review the top benefits and what they can do for you.

Top 5 benefits of a whole life insurance policy

1. Whole life insurance never expires

One of the most appealing benefits of purchasing a whole life insurance policy is this: As long as you pay your premiums, your death benefit will never expire. It’s guaranteed to be paid regardless of when you die, whether that’s tomorrow, in five years, in 50 years or even more.

That’s a key difference between whole life insurance and a term life insurance policy, which will pay the death benefit only if you pass away during the window of time (or term) that your policy covers.

2. Premiums on whole life policies stay the same

Another benefit involves premiums, which are the monthly payments that you make to an insurance company to pay for your policy. Whether you have a whole life or another kind of insurance policy, you’re required to pay premiums.

Some types of insurance policies may require you (or allow you) to adjust your premiums over time. But the premiums that you pay for your whole life insurance policy are guaranteed to remain fixed and consistent for as long as you have your policy. Your premium also contributes to your cash value.

3. Whole life insurance builds cash value

Cash value is one of the key living benefits of whole life insurance. A portion of every premium payment you make is added to your policy’s cash value, which accumulates slower in the early years of the policy. That becomes money that you can access at any time for any reason.¹ Since it’s guaranteed never to go down, it can become an important, stable part of your financial plan.

4. Whole life policies can earn dividends

In addition to guaranteed cash value growth, many life insurance companies pay dividends.² While you can take dividends as cash or use them to pay a portion or all of your premium, many people reinvest them in their policies. That can allow your death benefit and cash value to accumulate even more quickly.

5. Life insurance has several key tax advantages

Here are some of life insurance’s tax advantages to consider.

• You can borrow against your cash value without paying taxes³—as long as the loans are repaid properly. For example, you might borrow against your cash value to ride out a market downturn while you’re retired.
• The cash value growth (in addition to growth through dividends) is tax-deferred—you’ll owe tax on the growth only if you surrender your policy and take out the money. You can always take the amount you paid in premiums tax-free.
• You may be able to exchange a whole life insurance policy for another financial tool (such as an annuity or long-term care). A technique called a “1035 exchange” allows you to trade certain types of life insurance policies for similar financial tools—typically without incurring taxes.
• When you pass away, the death benefit is usually tax-free to your beneficiaries.

What are the advantages of living benefits of whole life insurance?

As you can see, in addition to its guaranteed death benefit, whole life insurance can become a financial asset that you can use throughout your lifetime. These “living benefits” of whole life insurance can make a whole life insurance policy one of the most flexible parts of your financial plan.

What is a living benefit rider?

A rider is an added benefit to a life insurance policy that comes with an additional cost. Think of it like upgrading certain features of a new car, similar to a high-end stereo or leather seats.

A living benefit rider typically allows you to access your death benefit early—while you’re still alive—for specific reasons, like a qualified long-term care event. Another example of a rider is something known as a waiver of premium benefit, which lets you keep your policy active if you’re unable to pay your premiums for certain qualified reasons. Your Northwestern Mutual financial advisor can explain more about available options you may want to consider.

What are the advantages of whole life insurance in retirement planning?

While many advisors at other firms focus only on investments to achieve financial goals in retirement, we believe that their investing-only approach is a one-dimensional solution for a multi-dimensional challenge. Investments are important—they can provide long-term growth. But investments alone are less likely to help you achieve long-term financial security or stability.

Research from EY, a professional services firm, shows that incorporating insurance and investments in your planning approach can leave you better off financially. According to EY’s analysis, when properly allocating your money across investments, permanent life insurance and deferred income annuities,⁴ you’re more likely to achieve better outcomes in retirement and leave a larger legacy than through investments alone.

Find the best life insurance policy for you

Although it may seem that you need to choose between whole or other kinds of life insurance, the truth is that many financial plans typically include multiple kinds of policies like term and whole life insurance. This can give you more freedom to get ready for whatever life brings. Your Northwestern Mutual financial advisor can help you find the right mix of insurance and show you how it fits into your overall financial plan.

¹Accessing your cash value will reduce your death benefit and may affect other aspects of your plan.

^*2Dividends are not guaranteed.

³Loans taken against a life insurance policy can have adverse effects if not managed properly. Policy loans and automatic premium loans, including any accrued interest, must be repaid in cash or from policy values upon policy termination or the death of the insured. Repayment of loans from policy values (other than death proceeds) can potentially trigger a significant tax liability and there may be little or no cash value remaining in the policy to pay the tax. If loans equal or exceed the cash value, the policy will terminate if additional cash payments are not made. Policyowners should consult with their tax advisors about the potential impact of their policy loans.

⁴ Income Annuity refers to a Deferred Income Annuity with increasing income potential, “which represents deferred income annuities with persistency bonuses and non-guaranteed dividends” referred to as “DIA with IIP” in the EY article.