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Whole life insurance can play a valuable role in helping families protect their assets and interests. Such coverage provides:
- A guaranteed death benefit.
- Cash value accumulation.
- Access to cash value during the policyowner’s lifetime.1
- A death benefit that is generally paid out free from income tax.
Indeed, the versatility of whole life insurance as a financial strategy tool is hard to deny. But whole life policies can differ significantly depending on the coverage provided. (Learn more: How life insurance provides 3 tax advantages)
Some prioritize cash value growth, while others may offer the potential for dividends (which are never guaranteed), different payment structures, or riders that allow policyowners to customize their coverage.
Premium costs can also vary widely based on whether the policy requires medical underwriting and the financial strength of the underlying company — a critical component that should not be ignored.
“Life insurance works if the company is still financially healthy decades from now,” said Abbe F. Large, managing director of Lenox Advisors in New York City, noting consumers should prioritize companies with a track record of dependability. “Independent financial strength ratings can help give families confidence that the insurer can pay claims, remain stable during market downturns, and honor the long-term promises built into the life insurance contracts.”
As such, families shopping for whole life insurance should be sure they understand the coverage options available and how such policies might help them reach their financial goals. But first, a primer.
What is whole life insurance
Whole life insurance is a type of permanent life insurance, which provides a guaranteed death benefit to the beneficiaries (often the children and spouse) when the policyowner passes away, provided the policy is in force. (Related: Your complete guide to understanding life insurance)
Permanent life insurance policies also accumulate cash value over time, which grows tax-deferred and can be accessed during the policyowner’s lifetime through policy loans or partial withdrawals.1
By contrast, term life insurance pays a death benefit only if the policyowner dies during the coverage term — typically 10, 20, or 30 years. Term life policies do not accumulate cash value.
Other types of permanent life insurance include:
- Universal life, which allows for greater premium flexibility. A policyowner may adjust the amount they pay in premiums each year — or even month to month — as long as there is enough cash value to cover the cost of insurance and administrative charges of the policy.
- Variable universal life (VUL) insurance, which lets you make your own investment choices within your policy. A VUL policy provides access to a number of different investment divisions, so you can choose options that align with your goals and tolerance for market and investment risk. (Learn more: What is variable universal life insurance?)
Connect with a MassMutual financial professional
Survivorship life insurance
Families that are focused primarily on estate planning goals and leaving a financial legacy behind might also consider a specific type of permanent life insurance called survivorship life insurance.
Such coverage, sometimes called “second to die” life insurance, pays a death benefit only after the second spouse passes away. As such, it can potentially be more affordable than traditional permanent life insurance.
In many cases, survivorship life insurance is used to pay estate taxes, preserve family wealth, or provide for a special-needs child after both spouses have passed away. (Related: Using survivorship insurance for estate planning)
Financial strength
Families that are considering whole life insurance protection should also look to the underlying financial strength of the issuing insurance companies.
- Check their ratings from independent agencies, such as A.M. Best, Fitch Ratings, Moody’s, and Standard & Poor's, for indicators of their financial health and ability to meet their claim commitments. (See: Understanding financial strength ratings)
- Research their customer satisfaction record using websites like JD Power and customer complaints through the National Association of Insurance Commissioners.
- Learn about their corporate structure. Some life insurance companies are publicly held by shareholders, while others are mutual companies, where participating policyowners share in the ownership. This can affect their business and investment objectives. (Learn more: 3 advantages of mutual insurers)
For example, mutual life insurers, such as MassMutual, focus, for the most part, on providing long-term value to policyowners while maintaining a high level of financial strength to meet future financial obligations to policyowners. (Read MassMutual’s investment philosophy here)
Publicly traded life insurers, on the other hand, tend to seek investments and performance that will support their stock price. And they may have more flexibility in raising capital.
(Related: What’s behind MassMutual’s financial strength?)
Cash value growth
Whole life policies that allow for faster cash value growth may be a better fit for families that prioritize future financial flexibility.
Cash value, which grows tax-deferred, can be accessed during the insured’s lifetime through a loan or partial surrender. And the funds can be used for any purpose, including medical expenses, college tuition, or supplementing retirement savings. (Related: How to borrow from your whole life insurance policy)
Be aware, however, that access to cash values will reduce the policy’s cash value and death benefit, increase the chance the policy will lapse, and may result in a tax liability if the policy terminates before the death of the insured.
Any cash value that does not get used can continue to grow and may increase the total death benefit that gets passed to the beneficiaries.
“For families that value the flexibility to borrow against their policy on a tax-favored basis, the efficiency of cash value growth is essential,” said Brian Kaplan, managing director of Lenox Advisors in New York, New York. “That growth within your policy can potentially create a versatile ‘opportunity fund’ for life’s milestones, providing liquidity that allows you to access capital for business expenses, education costs, or emergencies,1 without exposure to market volatility for some policies.”
By choosing a company that prioritizes long-term growth and policyowner access, he said, you can help ensure that your life insurance coverage can potentially serve as a powerful financial tool during your lifetime and after you're gone.
Dividend history
All whole life insurance policies offer a guaranteed minimum cash value growth rate, but participating policies (typically sold through mutual insurers) may also allow policyowners to share in company profits through dividends, which are based on the insurer’s performance and are not guaranteed.
Some companies have a longer history of paying dividends than others. MassMutual, for instance, has paid out dividends every year since 1869. (Check MassMutual's latest dividend and financial performance here)
Dividends can be taken as cash, used to pay premiums, purchase paid up additional life insurance, or left with the company to accumulate interest and potentially build cash value faster. (Related: What goes into whole life insurance dividends?)
“Dividend history matters, not because of future performance, but because it reflects the carrier’s long-term financial strength, discipline, and reliability,” said Large. “Families should absolutely consider it, especially with mutual companies, but they shouldn’t choose a policy based on the potential to receive dividends alone. The carrier’s overall financial strength and the quality of the policy’s design play a much bigger role in the long-term outcomes.”
Family-focused riders
Some whole life insurance policies also offer riders that may bring families peace of mind.
Riders, which typically require an additional premium payment, are add-on benefits to a policy that enable policyowners to customize coverage based on their unique financial needs. (Related: What is a rider on a life insurance policy?)
- Waiver of premium (if disabled) — This allows for the premiums on a life insurance policy (including those associated with certain riders on the policy) to be waived if the insured becomes totally disabled, as described in the rider. Cash value growth and any dividends payable may continue as if the policyowner were still paying.
- Child term rider — Depending on the carrier and policy type, this can potentially be added to a parent’s whole life policy to provide term life coverage for children until ages 18 to 25. Such riders may also allow the child to convert to a permanent policy down the road without the need for medical underwriting, which may help preserve future insurability.
- Spouse rider — Again, depending on the carrier and policy involved, this may allow policyowners to add coverage for their spouse while the primary policy remains in force, which may be cheaper than purchasing two stand-alone policies.
- Life insurance supplement rider (LISR) — This provides a mix of whole life insurance and one year term life insurance that is paid for by rider premiums and policy dividends. Since both the LISR term charges and dividends are not guaranteed, LISR premiums are not guaranteed. Such riders may be appropriate for budget-conscious policyowners seeking a lower-premium alternative when permanent coverage is desired, but the cost of an all-whole-life policy is prohibitive.
- Guaranteed insurability riders — Also called guaranteed purchase riders, these riders give policyowners the option to purchase a specified amount of additional life insurance coverage at certain times in the future. Parents and grandparents buying “starter” policies for their children and grandchildren typically add this rider to give their children the chance to increase their coverage if and when they start families of their own.
Coverage amount
Lastly, when purchasing life insurance, families should be sure that they are purchasing enough coverage to protect their families.
This calculator is a good starting point for determining how much life insurance you may need.
Many policyowners purchase life insurance with the goal of replacing a portion of their income if they were to die unexpectedly, with a big enough death benefit that their spouse and children would be able to maintain their lifestyle. But many also make the mistake of selecting a death benefit based on their current income without factoring in their future earnings potential. (Deeper dive: How much life insurance should I get?)
Others choose a life insurance policy to help their loved ones pay off debt, including their home mortgage, student loans, or future college costs for their children.
In some cases, younger families with a limited budget initially choose to purchase term life insurance to secure a bigger death benefit for less and later convert to permanent life insurance as their income allows and their financial focus shifts to estate planning.
If that’s your goal, however, just make sure that your term life policy allows for future conversions without a medical exam. Access to permanent life insurance might otherwise be harder to obtain if you develop a chronic health condition as you age. (Learn more: The pros and cons of converting term life to whole life)
Conclusion
Whole life insurance can play a pivotal role in helping families secure their financial future and protect the ones they love. But individual policies can differ substantially based on how quickly they accumulate cash value, whether they offer the opportunity to receive dividends, and the financial strength of the issuing insurance company.
A financial professional can be instrumental in helping families determine how much and what type of insurance protection their household may need.
“When choosing a policy, families should look for assistance from a financial professional who can provide clarity on where they are today and where they want to go,” said Kaplan. “Financial professionals can help you focus on building a strategy that isn’t just a contract, but a living financial foundation designed to evolve with your family’s dreams. You want a policy backed by a company that views you as a permanent client, not just a policy number.”
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Frequently asked questions about whole life insurance for families:
Q: How do I determine how much life insurance coverage my family actually needs?
A: Calculating your family's life insurance needs requires careful consideration of multiple financial factors that directly impact your loved ones' future security. Start by evaluating your annual income and multiplying it by the number of years you want to replace that income stream. As a rule of thumb, some financial professionals recommend coverage equal to 10 to 15 times your annual salary. However, this rule of thumb is merely a starting point. You must also account for outstanding debts, including your mortgage balance, car loans, credit card obligations, and any other liabilities that would burden your family in your absence. Educational expenses represent another critical component, particularly if you have young children who will eventually pursue higher education. The goal is to help ensure that your family can continue their lifestyle without financial hardship while meeting future obligations and goals.
Q: What's the difference between term life insurance and permanent life insurance?
A: Term life insurance provides coverage for a specific period — typically 10, 20, or 30 years — and pays a death benefit only if you pass away during that term. This type of policy typically offers the most affordable premiums because it includes no cash value component and coverage expires at the end of the term. Permanent life insurance, conversely, is designed to provide lifetime coverage as long as the policy remains in force and required premiums are sufficient to cover policy charges. Many permanent policies are designed to build cash value over time, which you can borrow against or withdraw during your lifetime.1 Your choice between these options should align with your family's financial goals, budget constraints, and long-term planning objectives.
Q: What questions should I ask a financial professional before purchasing a policy?
A: Start by inquiring about their experience and qualifications — how long they've sold life insurance, what professional designations they hold, and whether they specialize in serving families with circumstances similar to yours. Request a clear explanation of how they are compensated. Also inquire about the insurance companies they recommend and why, asking specifically about each insurer's financial strength ratings, claims payment history, and customer service reputation. Before reviewing policy options, discuss your specific coverage needs and goals to ensure that the agent conducts a proper needs analysis.
Discover more from MassMutual…
Survivorship life insurance for 3 estate planning needs
The power of a term-perm life insurance combination
Need a financial professional? Find one here
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1 Access to cash values through borrowing or partial surrenders will reduce the policy’s cash value and death benefit, increase the chance the policy will lapse, and may result in a tax liability if the policy terminates before the death of the insured.
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