Learn how whole life insurance works and what policy features to look for to see if you're a good candidate for this type of coverage.

What is whole life insurance?

Whole life insurance is a type of permanent life insurance that provides lifelong coverage with level premiums, which means you pay the same amount each month.

These policies also function as investment products. When you pay your premium, a portion of it is invested to provide your policy with cash value, which grows at a fixed rate determined by your insurer — typically 1.5 percent to 3.5 percent, according to Consumer Reports. This distinguishes whole life insurance from other permanent policies that do not guarantee returns.

Once you've accumulated enough cash value, you can begin borrowing against your policy. In addition, your beneficiaries will receive a tax-free payout if you die.

How much does whole life insurance cost?

Whole life insurance is generally more expensive than term life insurance. This is due to the fact that it lasts your entire life and provides cash value growth, as well as the possibility of commission fees if purchased through a life insurance agent.

The annual cost of whole life insurance for a healthy applicant buying a $500,000 policy at 40 years old is $5,728, compared to $315 for a 20-year term life policy. However, if you need coverage that will last your entire life and want a guaranteed return on the policy's cash value, whole life may be a good fit.

Is whole life insurance worth it?

If you meet the following criteria, whole life insurance may be a good fit for you:

• You can afford to pay the higher premiums.
• You have a high income and have maxed out other investment accounts, such as 401(k)s.
• You want to treat your life insurance policy as if it were cash.
• You have a long-term dependent, such as a special-needs child.
• You're looking for a policy that provides guaranteed cash-value returns.
• You are a wealthy individual who wishes to use your life insurance policy to assist your heirs in paying estate taxes.

How to find the right whole life insurance policy

A whole life insurance policy is an expensive commitment, so do your homework and compare policies before purchasing.

Choose the amount of coverage you need

To determine how much life insurance you require, consider what you want the policy to accomplish. A small policy — $10,000, for example — may cover the cost of a funeral. However, if you have additional priorities, such as funding a trust for a child, you will require more.

Examine riders

Riders are coverage features that can be added to a life insurance policy. They are either included in the policy or can be purchased at an additional cost, depending on the policy. An accelerated death benefit or chronic illness rider, for example, allows you to access a portion of the death benefit if you develop a chronic health condition or become terminally ill. Another option to consider is a premium waiver rider, which allows you to skip payments if you become disabled.

Rider types and costs vary by insurance company, so make sure your policy includes the riders you want before purchasing.

Look at the rate of return on cash value

A portion of your premium for whole life insurance is invested in a cash value account, which typically grows slowly and tax-deferred. You can borrow against the cash value, use it to purchase additional insurance, or surrender the policy for cash. If you do not repay a loan, the death benefit may be reduced, and it does not pay out if you surrender the policy.

Whole life policies guarantee a minimum cash value growth rate. Some policies may be eligible for dividends, which are percentages of the insurer's financial surplus. Dividends aren't always guaranteed, but they're worth considering when comparing policies.

Life insurance companies will occasionally provide projections of how the cash value of each policy may perform. Always inquire as to which aspects of the projection are guaranteed.

Understand the different approval processes

Approval processes are classified into three types.

1. Filling out a lengthy application and taking a life insurance medical exam are typical requirements for fully underwritten whole life insurance.
2. Simplified issue whole life insurance involves answering some health questions, but there’s no medical exam.
3. Guaranteed-issue whole life insurance means you'll be accepted without having to take a medical exam or answer any health-related questions.

Even if you have some health issues, a fully underwritten policy will usually provide you with the most competitive price.

If you've been turned down for standard whole life insurance due to health issues, simplified issue and guaranteed issue life insurance policies are worth considering, but be aware of the drawbacks. When compared to fully underwritten products, death benefits on these policies are relatively small, and premiums can be expensive. Furthermore, if you die of natural causes or by suicide within the first few years of coverage, you will not receive the full death benefit.

Compare whole life insurance quotes

Get life insurance quotes for the same amount of coverage from several insurers to compare prices when shopping for life insurance. You may discover that whole life insurance rates vary greatly.

Check the insurer’s financial strength

Check the financial strength rating of each whole life insurer you're thinking about using. A rating firm, such as A.M. Best, can provide financial information. Financial strength is important because a strong company is more likely to be around to pay claims decades from now.

A company with an A.M. Best rating of B+ or higher, in A.M. Best's opinion, has a good ability to meet its obligations. InsuredCircle typically recommends looking into insurers with A- or higher ratings.

Research the insurer’s reputation for customer service

On the website of the National Association of Insurance Commissioners, you can look up an insurer's complaint index. The score is based on the number of complaints filed with state regulators against the insurance company, adjusted for the company's market share (based on premiums written). The average is one, so a score greater than one indicates that the company received more complaints than was expected for its size.

Alternatives to whole life insurance

Whole life insurance is appropriate for some people, but term life insurance is adequate for the majority of families. While these policies have no cash value and will expire at the end of the term, they typically have lower premiums than whole life insurance.

Universal life insurance is another option. These policies cover you for the rest of your life and allow you to adjust your premiums and death benefit amount as needed.