Only about 1 percent of all term life insurance policies ever pay out a claim. Because of this, life insurance companies devised a method for increasing the premium above the true cost of insurance, leveled out the premium payments, and provided lifetime coverage for individuals. This "term to age 100" policy represented the first whole life coverage offered to the public. Today, whole life insurance still provides lifetime coverage, but offers unique benefits not found in early whole life policies.

Level Premium Funding

The insurance company makes a whole life policy work through the use of level premium funding. The insurer collects far more than what it costs to insure your life. The excess premium is invested by the insurance company, and helps to hold down future costs of insurance. Because your risk of death increases as you get older, the excess premium acts as a way to pay off insurance costs which only go up with age. The result is that your premiums stay level for your entire life, and the insurer can guarantee your death benefit until your age 100.

Cash Value

Today, whole life builds a cash value. A cash value is a reserve amount offered by the insurance company. This reserve is set aside to pay for the future, rising, cost of insurance. The cash value is not technically a separate component of the policy. Rather, the cash value is part of the death benefit. As the cash value builds up, the amount of pure insurance decreases as it is replaced by the cash reserve.

During your lifetime, you may borrow against this cash reserve through policy loans. If you reach age 100, you have the option of taking the full cash value amount, which is equal to the death benefit, or you may leave the amount on deposit with the insurer until your death. If you die prior to reaching age 100, the insurance company pays out your death claim to your named beneficiaries.

Non-Guaranteed Elements

Non-guaranteed elements have been added to whole life insurance over the years to make the policy more competitive. Investing the excess interest in the company's general account allows the insurer to pay excess interest to the policy, thus increasing the policy's cash value amount over the guaranteed accumulation schedule. Insurers may also pay dividends on the policy based on the insurer's investment and mortality experience (how well they did in their investments, and how many deaths they realized in the course of the preceding year). The fewer deaths realizes, and the higher the investment returns of the insurer, the larger the dividend payment.

Accelerated Death Benefit

Insurers also offer accelerated death benefit options in the event you are diagnosed with  chronic or terminal illness. If you are diagnosed with a life-threatening illness, many insurers will allow you to start spending the whole life death benefit before your death. Any amount left at your death is passed on to your beneficiaries.


The two primary criticisms of whole life are that it is an expensive form of insurance and that the cash value does not offer a good rate of return on your premium investment. While whole life premiums are always initially higher than term life insurance, the long-term effect of the higher premium is that whole life actually carries the lowest insurance cost if the policy is held until age 100. Term life premiums increase substantially after age 60 or 65, while whole life premiums never increase. While whole life insurance cash values are not designed to replace investments, they do provide investment returns that mirror fixed interest investments. You should not view whole life as a replacement for mutual funds or a stock investment, but rather a supplement to the fixed-interest portion of your investment portfolio.