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How does a whole life insurance policy work?

Allen Wastler

Posted on February 24, 2023

Allen Wastler is a former financial journalist with over 30-years of experience, including time at CNBC, CNN, and Knight-Ridder Newspapers.
Understanding whole life insurance
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Tell you how whole life insurance policies work to provide you with protection through a guaranteed death benefit.

Describe the cash value and tax-deferred growth features that whole life insurance also offers.

Note that dividends, while not guaranteed, can also be an attractive benefit for those considering a whole life insurance policy.

If you are considering life insurance, one of the choices you’ll likely encounter is whole life insurance.

Whole life, which is a type of permanent life insurance, offers a guaranteed death benefit throughout a policyowner’s life, provided the premiums are paid for a specified period. Whole life and other types of permanent insurance are distinct from term insurance, which only provides coverage for a certain time period.

Additionally, whole life insurance policies offered by life insurance companies provide:

Also, some policies offered by mutual life insurance companies are eligible for dividends.

“Whole life can be a good fit for those who like a conservative approach,” said J. Todd Gentry, a financial professional with Synergy Wealth Solutions in Chesterfield, Missouri. “You are protecting against a pre-mature death, but also building toward the future. And in doing that, you are transferring inflation and market risk onto the insurance carrier.” (Related: How whole life can help through life stages)

Guaranteed death benefit.

A whole life insurance policy ensures a guaranteed tax-free death benefit, which means that your loved ones will receive a lump sum of money when you pass, regardless of how long you live. A whole life insurance policy tends to cost more than a term life insurance policy. But the protection a whole life policy offers lasts a lifetime.

Of course, a whole life policy can have a number of payment options, which can offer flexibility and affordability. A whole life insurance policy can be paid up in as few as a dozen premium payments to as many as 100 premium payments, depending on the terms of the policy. (Related: Life insurance premium options: Which one is right for you?)

Besides helping loved ones cope with income issues from the loss of a breadwinner or cover final expenses, death benefit proceeds can also be used to accomplish other goals as well. For example, proceeds from a whole life insurance policy can be used to pay future estate taxes or to settle the policyowner’s debts. (Related: 8 options for using death benefit proceeds)

Tax-deferred growth of cash value

As premiums get paid, the cash value of a whole life insurance policy builds up over time. And that cash value grows on a tax-deferred basis. That means you don’t pay taxes on the growth of the cash value unless you cancel the policy or withdraw more than you've paid in premiums. (Related: Understanding cash value)

The growth in cash value is based on a rate guaranteed by the insurance company. That means the cash value increases each year and never declines in value due to market conditions. For that reason, some look at whole life insurance as a way to diversify financial holdings.

Ability to borrow against cash value

You can borrow against the cash value in a whole life insurance policy at any time and for any reason. For instance, cash value can be used to help cover the costs of a sudden emergency or a college tuition payment. Some people use it as a supplement for retirement income in a market decline so that market-based investments don’t have to be accessed before, hopefully, recovering in value.

Additionally, you can access the cash value in a policy on a tax-advantaged basis. Money borrowed or taken from the cash value of a life insurance policy is not subject to taxes up to the “cost basis” – the amount paid into the policy through premiums. (Related: 3 tax advantages of life insurance)

However, tapping into the cash value of a life insurance policy reduces its value and death benefit and increases the chance the policy will lapse. And if a policy lapses with an outstanding loan in excess of the cost basis, it’s taxable. And in that event, taxes are due on any gain in cash value, including borrowed cash value.

Opportunity for dividends

Beyond guaranteed protection and the ability to build cash value, participating whole life insurance from mutual insurers typically offers the opportunity to earn dividends. (Related: Mutual vs. stock insurers)

Dividends aren’t guaranteed. And the amount of the dividend and the dividend payout itself are subject to change, depending on the operating performance experience of the insurance carrier in a given year. But most insurance companies endeavor to pay them on a consistent basis. For instance, MassMutual has paid out dividends consistently since shortly after the Civil War. (Related: What goes into whole life insurance dividends?)


Despite the advantages, whole life insurance may not be the best choice for everyone. For some people, another type of permanent insurance — like universal life insurance or variable universal life insurance — or even term life insurance might be a better option.

But for others, a whole life insurance policy may provide just the right combination of protection and long-term financial value. Also, whole life insurance can be used to help accomplish certain specific goals for retirement or estate planning. And the addition of riders can customize a whole life insurance policy further still. (Related: Understanding life insurance policy riders)

Many opt to consult a financial professional to understand what might be appropriate for their individual situation.

Discover more from MassMutual …

Whole life insurance: Criticisms and rebuttals

9 questions to ask about life insurance

Is group life insurance enough?

This article was originally published in January 2021. It has been updated.


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The information provided is not written or intended as specific tax or legal advice. MassMutual, its employees and representatives are not authorized to give tax or legal advice. You are encouraged to seek advice from your own tax or legal counsel. Opinions expressed by those interviewed are their own and do not necessarily represent the views of Massachusetts Mutual Life Insurance Company.