Whole Life Insurance


Whole Life Insurance | Table of Contents

What is Whole Life Insurance?

The key to understanding whole life insurance is knowing it is a contract with set premiums determined at policy inception, a guaranteed death benefit and guaranteed cash value growth

This type of life insurance policy is actuarily designed so the cash value will gradually increase due to the guaranteed interest rate credited to it and equal the contract’s death benefit “face amount” at maturity as long as premiums are paid as scheduled (most whole life policies mature at age 100 to 121.) 

If any premiums are missed, or if any loans are outstanding where the policy is used as collateral, the policy’s death benefit is reduced by the amount of those amounts of money (and any interest that money would have earned had it been available to the policy.)

The insurance contract can make these guarantees because this type of life insurance policy has both a guaranteed interest rate associated with the cash value and a fixed cost for insurance built into the policy, which is unique compared to all other types of cash value life insurance contracts.

In addition, whole life policies offer a number of other benefits for the policy owner on top of those listed above. 

This makes whole life insurance an attractive option for those looking for lifetime death benefit protection, cash value accumulation, safety of principle and peace of mind.

Whole life insurance is one of the two main types of permanent life insurance, the other being universal life insurance

As its name suggests, whole life insurance provides coverage for the insured’s entire life. 

This makes it a possible choice for those who want to ensure that their loved ones will be taken care of financially in the event of their death and other estate planning goals.

The Different Premium Configurations of Whole Life Insurance

Whole life insurance is manufactured so that, as the premiums are paid as scheduled and the guaranteed interest rate is applied to the cash value, the cash value of the policy will gradually increase over time and ultimately be equal to the death benefit at a given age stated in the policy (usually around 120 years old.) in addition, the policy will pay a guaranteed death benefit if the insured passes away before then. 

The cash value growth of a whole life insurance contract is a function of both when the premiums are paid, and the rate of return on the cash value. The rate of return realized by a whole life contract may exceed the guaranteed rate of return promised in the contract, but they will never be lower.

A policy owner can choose to pay level premiums for the life of the policy (straight whole life), higher premiums up front and less in later years, building the cash value faster (limited pay whole life),  a one-time lump sum payment (single premium whole life) or lower premium amounts in early years and more premium amounts in later years to make them up (modified and graded whole life.)

 An agent at Decision Tree Financial will help you design the best premium for you if whole life insurance is the best solution. See below for more information:

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Straight Whole Life Insurance

Sometimes called ‘level-premium life insurance”, Straight Whole Life Insurance is designed for the policy owner to pay level premiums for the life of the contract.

Limited Pay Whole Life Insurance

Limited Pay Whole Life Insurance allows a policy-owner to contribute additional upfront level premiums over a number of years in order to be “paid up” in less years straight whole life

Single Premium Whole Life Insurance

Single Premium Whole Life Insurance is a limited pay premium policy where the policy owner makes a one-time premium payment at the time the policy is issued which causes the to be fully funded with no additional premiums needed.

Graded Premium Whole Life Insurance

Both Modified and Graded Premium Whole Life Insurance policies require less premium in the policy’s early years but require the policy owner to make larger premium payments in the future to “catch up” the policy’s cash value so that it will still equal the death benefit at a stated age.

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Graded Benefit Whole Life Insurance

Graded Benefit Whole Life insurance is a type of permanent life insurance policy where the full death benefit is not available to beneficiaries in the first couple years but will become fully available after a certain period of time has passed.

Learn More…

Financial Strategies Where Whole Life Insurance Can Dominate The Alternatives

Key Features of Whole Life Insurance

Benefits of Whole Life Insurance

Whole life insurance has features that make it an attractive option for those looking for lifetime protection.

These features include:

Level premiums: Regardless of whether the policy owner chooses to pay monthly or annually, the premium will not increase as the insured gets older get older, making whole life insurance more affordable in the long run.

Cash value accumulation: Whole life is contractually guaranteed to build cash value over time. The cash value will equal the policy’s death benefit at maturity. During the life of the insured, these cash values can be accessed through loans or withdrawals.

Death benefit guarantee: The death benefit of a whole life policy is guaranteed to be paid out, no matter when the insured dies. If the insured survives the entire length of the contract, the cash value is contractually guaranteed to equal the death benefit and the policy owner has choices on what to do with the proceeds.

Tax deferred growth and tax-free death benefit: The cash value of whole life grows on a tax-deferred basis, meaning you won’t have to pay taxes on the cash value while it grows inside the policy. 

There is a tax liability if the policy owner surrenders the policy, and the proceeds exceed the total premium payments made less any other withdrawals. 

However, the death benefit proceeds of any life insurance policy is 100% income tax free at both the federal and state levels, so any policy loan outstanding at death are paid off with the death benefit proceeds resulting in no tax consequences for the policy owner or their estate.

Drawbacks of Whole Life Insurance

Whole life insurance policies also have a couple key drawbacks to be aware of. These are:

Higher premiums: Whole life insurance policies requires more premium than term life insurance for the same amount of death benefit.

Surrender charges: The insurance company “front-loads” all of the expenses in the policy. Therefore, if the policy is canceled in its early years, it may be subject to a surrender fee.

Less Flexible Premiums than other Cash Value Life Insurance: To maintain the guarantees the contract affords, premiums are determined at the time of issue and can not be increased to gain more coverage or cash value.

Whole Life Insurance Living Benefits: You Don't Have To Die To Collect

Whole life insurance policies also offer a number of “living benefits” that can be accessed while you are still alive. These benefits include the following:

Policy loans

Policyowners can take loans against their whole life policy’s cash value, typically up to 90% of what is there.

The loan will accrue interest owed to the insurance company, but it does not have a repayment schedule, and not repaying the loan will not hurt one’s credit score.

The loan granted by the insurance company and any interest charged against the policy can optionally be repaid while the insured is alive, or it will be repaid when the insured dies (out of the death benefit) or is surrendered.

In these two events, the insurance company takes back what they owed before providing the beneficiary with the benefits they are entitled to.

Surrender Value

If the owners cancels their policy before the maturity date, they will receive 100% of the cash surrender value of the policy. The cash surrender value is typically less than the death benefit, but it can still be a significant amount of money.

Accelerated Death Benefit

If the insured is diagnosed with certain illnesses or are in need of long-term care, the owner can access the death benefit of whole life insurance while the insured is still alive. This benefit can help by providing much needed funds to ensure a family or business has the financial resources needed during a difficult time.

Waiver of Premium

In the event the policy owner meets the definition of becoming disabled, the waiver of premium optional rider will be activated, and the insurance company will pay the full premium payment on behalf of the policy owner allowing for the contract to “self-complete.”

As disability insurance will typically only cover 2/3 of a person’s earnings, this feature allows the policy owner to continue building equity and wealth during a potentially very stressful time.

What Are Optional "Riders" Available With Whole Life Insurance

Some of the more common riders available with whole life insurance policies include:

1) Accelerated Death Benefit Rider – This rider provides for payment of a portion of the death benefit while the policyholder is still alive if they are diagnosed with a terminal illness.

2) Living Benefits Rider – This rider provides for accelerated payment of the death benefit if the policyholder becomes chronically ill or disabled.

3) Waiver of Premium Rider – This rider waives the policy’s premium payments if the policyholder becomes disabled. The insurance carrier makes them on behalf of the ower thus allowing the cash value to continue to grow as scheduled.

4) Child Rider – This rider provides for additional term life insurance coverage for the children of the policyholder. It may cover all current and future children.

5) Spouse Rider – This rider provides for additional term life insurance coverage for the policyholder’s spouse.

6) Guaranteed Insurability Rider – This rider allows the policyholder to purchase additional life insurance coverage at specified intervals without having to undergo a new medical exam.

The age is typically limited to below age 40, so it is useful as a policy for young professionals with high earning potential and business owners.

Other life insurance options instead of this rider are to have layered term insurance policies with guaranteed conversion options. Talk to a decision tree financial professional to find which life insurance option would be best for you.

7) Automatic Premium Loan Rider- This rider automatically loans the policyholder the amount needed to keep the policy in force if they cannot make a premium payment.

8) Paid-up additions rider – This rider allows the policyholder to make additional yearly premium payments that will increase the death benefit and cash value of the policy.

There is a maximum amount of paid-up additions one can add to the policy to have it still be considered “life insurance.”

If those premiums are exceeded, the policy becomes something known as a “modified endowment contract,” which is taxed differently than life insurance.

Why Would Someone Want to Pay More Premiums Than Required For Whole Life?

The answer to this question depends on each individual’s financial goals.

Some people may design their policy to be a single-premium or limited pay whole life policy to either build up cash value faster, which can be used both as a source of funds in the future and additional paid-up insurance or to get the funding completed sooner so that the cash value can grow tax-deferred and complete the policy funding requirements.

Many policy owners accelerate the funding of their whole life policies because cash values In are protected from lawsuits and creditors. The amount of creditor and lawsuit protection depends on the state where the policy owner resides.

Ask a Decision Tree Financial professional how much is protected in your state.

The guaranteed cash value feature of whole life insurance provides safety of the principal feature with a rate return that will typically exceed that of a bank savings account.

It also protects the owner’s principle from the potential loss of principal that is possible when investing directly into bonds due to interest rate risk when interest rates increase.

Lastly, those who purchase their whole life from a “Mutual Insurance Company” may want to pay more premiums than are required for a policy because the extra cash value is eligible to receive policy dividends.

For these reasons, people will many times design whole life insurance so they can get as much money in the policy as fast as possible.

We use whole life insurance for our SALLO investment strategy for these very reasons.

"Stock" vs. "Mutual" Whole Life Insurance Companies

Stock Life Insurance Companies

Stock life insurance companies are owned by stock holders and their purpose is to make those stock holders money. Though they have to provide competitive rates, any money they earn above their cost is allocated for use by their shareholders.

Stock life insurance companies have a number of advantages, including the following:

– They tend to be more innovative than mutual companies.

– They often have lower expenses than mutual companies.

– They typically offer a wider range of products than mutual companies.

Drawbacks of Stock Life Insurance Companies

Stock life insurance companies also have a few drawbacks, including the following:

– They are for-profit businesses, so their primary goal is to make money for shareholders.

This can sometimes result in higher premiums and less-than-optimal customer service.

– They can be more volatile than mutual companies. For example, their stock prices can fluctuate wildly in response to economic changes.

Mutual Whole Life Insurance Companies

Mutual life insurance companies are owned by whole life insurance policy owners.

Their purpose is to provide coverage for the lowest possible cost.

They do this through risk-managed investing and prudent underwriting so that any “surplus” left after cost and claims will be returned to the mutual contract holder in the form of a dividend (see below.) 

Mutual life insurance companies have a number of advantages, including the following:

– They are not-for-profit businesses, so their primary goal is to provide coverage for policyholders.

This can sometimes result in lower lifetime premiums and better customer service.

– They tend to be more stable than stock companies.

For example, their policyholders are typically less likely to cash out their policies in response to economic changes.

Drawbacks of Mutual Life Insurance Companies

Mutual life insurance companies also have a few drawbacks, including the following:

– They are not-for-profit businesses, so they often have higher expenses than stock companies.

– They tend to be less innovative than stock companies.

– They typically offer a narrower range of products than stock companies.

What Are Whole Life Insurance Policy Dividends?

Life Insurance Policies purchased from Mutual Companies (and some stock companies that were once mutual companies life MetLife and Prudential) are eligible to receive dividend payments to their whole life insurance policy owners.

Dividends are NOT CONSIDERED INCOME like a dividend received from an investment holdings.

Instead, the dividends from a whole life insurance policy are considered “a return of excess premium paid” to provide insurance to the policy owner.

This definition allows the dividends received from whole life insurance to receive favorable tax treatment as the IRS defines them as the “giving one back their own money.”

This is true even if the dividends received by the policy exceed the total cost basis of the policy.

Like the dividends earned from investments, dividends from a whole life insurance policy ARE NOT guaranteed.

A mutual life insurance company could experience a loss or project their costs to increase in the future, causing them to retain that money for future liabilities. 

What Can One Do With Whole Life Insurance Dividends?

There are (5) options a policy owner can do with any policy dividends they receive. These (5) options are:

  1. Use dividends to purchase “Paid-Up Additions” which are single premium whole life contracts added to the contract and issued based on the insureds current age and health classification at policy inception.
  2. Use dividend to Pay the Policy Premium.
  3. Place dividend in an account to Accumulate Interest.
  4. Receive the dividend for their Cash Value.
  5. Use dividend to Purchase One-Year Term Life Insurance to increase the death benefit that one year

What are some Mutual Life Insurance Companies Decision Tree Financial Represents?

Because buying a whole life insurance policy from a mutual company makes the whole life insurance policy owner an owner of the company as well, you may be wondering which whole life companies we work with.

Decision Tree Financial Represents the following mutual life insurers:

Two mutual insurance companies not on the list are State Farm Life and Northwestern Mutual. These two are “captive” insurance carriers and don’t contract with brokers. 

The agents at Decision Tree Financial are independent financial professionals who act as brokers representing our clients to find the best solution to fit their needs.

 We do not represent these two carriers directly but do have relationships with agents who are so that when these companies offer the best solution, we help our clients obtain coverage through those affiliated companies.

What are Whole Life Cash Values Invested In?

The cash value of a whole life insurance policy is invested in a variety of different assets, including stocks, bonds, and real estate. 

The exact mix of investments depends on the specific policy and the insurer, but the goal is to provide stability and growth for the cash value.

Whole Life Insurance Cash Value Investments

What Rate of Return Do Whole Life Cash Values Generate?

The rate of return, or what many policies call “The Internal Rate of Return” that the cash value of a whole life insurance provides depends  on a number of factors, including the insurer, the policy terms, life insurance options selected and the investments made with the cash value.

For some policyowners, the returns have been higher than 13% in the past (Guardian, 1986) and are in the 5-6% range in 2022

These rates exceed the guaranteed rate of return all whole life insurance cash values provide.

You can see here, the most dominate factor in determining the rate of return a whole life policy will earn is the prevailing interest rate present in the economy.

Other Factors That Impact The Investment Return of Whole Life Insurance

As stated earlier, whole life is not an investment

It is insurance and because of this, you will want to understand how the internal rate of return of a policy’s cash value is determined. 

In a nutshell, this comes down to how the policy is manufactured.

Like any product, the company manufacturing it has to understand its cost. 

When and life insurance company manufactures a whole life insurance policy, it bases its price on 3 main factors. There are:

1) Expected Mortality Expenses.

2) Policy Expenses (such as sales and home office support.)

3) The cash values Investment portfolio.

Is Whole Life Insurance a Good Investment?

Althought the cash value of a whole life insurance policy generates a rate of return, and you may here people compare this product to investments – whole life insurance IS NOT an investment!

Whole life is INSURANCE with benefits that no investment is designed to provide. 

Whole life insurance just happens to have a rate of return on the cash value it accumulates

This may sound like semantics, but it isn’t.

Investments have the potential for both gain AND loss. 

The cash value of a whole life policy will not lose money based on investment returns.

Instead, the policy’s cash value has a guaranteed rate of return with the potential for more when the policy distributes dividends. 


Leveraging Stable Assets, Life and LEAP Options

Any additional return that exceeds the guaranteed rate, like from the receipt of dividends, is an extra bonus to the contracts guarantees though historically mutual life insurance companies have provided consistent dividend payments to their policy owners. 

Of course, past performance is no guarantee of future results, just like an investment.

The cash values of whole life will generate higher internal rates of returns for people who are younger, healthy, and non-tobacco users. 

In addition, women have better rates of returns in their cash values than men when all other underwriting attributes of the policy are the same.

The fact that life whole life is insurance with a rate of return makes it the perfect tool to use for many investors who utilize The SALLO Investment Strategy, which you can learn about here.

How is Whole Life Insurance Taxed?

Whole life insurance cash values are taxed in a “first in – first out” fashion, meaning that the premiums the owner contributes (the cost basis of the policy) come out first when withdrawn.

Any money withdrawn from a whole life insurance contract that exceeds the cost basis is taxed as ordinary income

However, if a policy owner borrows the cash value, the loan starts accumulating accrued interest which will also reduce the cash available and death benefit, but not subject to income taxes.

Any dividends received from a whole life insurance policy are received income tax-free, as well as the IRS, considers these to be a “return of excess premium.” 

This is why we call the money left over after a mutual life insurance company pays all of its costs a “surplus” and not a “profit” because surpluses aren’t taxed, and profits are.

The death benefit associated with a whole life insurance contract is income tax-free to the beneficiaries though they may be subject to estate taxes. 

The income tax-free death benefit can also be used to pay off any outstanding loans on the policy, even loan amounts that exceed the basis of the policy.

What Can I do With a Whole Life Policy If I no Longer Want It?

The cash value and death benefit guaranteed to pay out if the policy is kept long enough gives life insurance value. That value always belongs to the policy owner.

If you own a whole life insurance policy you no longer want, there are (3) surrender options built into the contract. These are:

1) Take the cash value and terminate the policy

2) Reduce how much life insurance death benefit the policy provides and create a “paid-up” whole life insurance policy providing lifelong coverage with no additional premiums required

3) Use the cash value to buy “extended term life insurance,” which provides the same amount of guaranteed payout, but coverage will expire when the cash value has been consumed.

If the life insurance plan is no longer needed, but the policy builds cash value that exceeds the basis, option #1 of surrendering the policy for cash could generate some tax consequences for the insured. 

To overcome this potential problem, a whole life insurance policy the owner no longer wants can be exchanged, typically tax-free, into an annuity contract.

This will allow the cash value to continue its tax-advantaged growth without the burden of paying the life insurance costs. 

This transfer is done through the execution of an IRS code 1035 exchange. 

An agent at Decision Tree Financial can help you with at no additional cost if it is the right solution for your unique situation.

Lastly, an option available to some policy owners is where they can sell their policy to a third party in what is known as a “life settlement option.”

In a life settlement, an investor will buy a life insurance policy from an owner for more than the cash value but less than the face amount. This is an option for everybody should discuss if they have had their life insurance policy for a long time. 

Life settlements are available for all types of life insurance, even term life!


If you have a life insurance policy you no longer want, talk to a financial professional at Decision Tree Financial to discuss your options.

What Are The Commissions on a Whole Life Insurance Policy?

We understand this the commissions paid on a whole life insurance policy concerns potential policy owners. 

As of now, there are not any “commission-free” whole life insurance contracts like there are with universal life and annuities (available through Decision Tree Investment Advisors.)

Whole life insurance is a front-end loaded commission product and can take many years for the cash value to equal the premiums paid.

The first-year commission of a whole life insurance policy is typically 100% of the “target premium,” which is typically equivalent to the premium for a straight whole life policy for a similar death benefit.

Any paid-up additions earn a 3-5% commission as well. 

Subsequent target premiums in later years earn commissions of 10-12% for the few years, then eventually decrease down to 2% in later years. There are no fees or commissions paid on the accumulated cash value of whole life like there is with “commission free” life insurance.

All of this means that if you pay $1,000 in premiums during the first year, the agent will receive $1,000 in commissions. 

In subsequent years, the agent’s commission is generally 10-12% of the premium paid. 

However, after the several years, this percentage decreases. For example, an agent’s commission on a $1,000 premium paid after 5-years  only be $20 while the cash value has grown to $15,000.

It is important to understand and compare the difference between paying a front-loaded commission or an ongoing management fee for both your short and long-term financial goals.

How Can I Find Out If Whole Life Insurance is Right For Me?

The most important part of life insurance a young family or business is the death benefit protection a life insurance policy provides. 

If you know your coverage is inadequate, it is best to buy term life insurance policy right away. 

Because of the financial commitment necessary to purchase whole life, a comprehensive financial analysis should be performed so you know exactly what to do and why to create the financial future you desire. 

Decision Tree Financial does this thought our Wealth Manifestation Process which you can learn about here.


If you are looking to purchase a product to provide $20-30 for final expenses, a term policy isn’t the right choice. 

In this case, purchasing a lower face amount whole life insurance policy is the best option. Before buying a final expense policy, consider if there are any funds available from other sources to provide those money’s as final expense insurance can be expensive.

Though there are several options to surrender a whole life policy if you no longer want it, buying this form of life insurance coverage is a significant long-term commitment.

 Decision Tree Financial typically recommends someone buy term-life insurance to cover their immediate life insurance needs.

We understand it is difficult to understand why one would want to pay 20x more for the same death benefit coverage and that is why we recommend participating in our Wealth Manifestation Process in order to take a comprehensive view of your current financial situation, your short-term and your long-term financial goals. 

This way you can see all of the financial alternatives you have and how they impact each part of your financial life to see if whole life insurance is the best place to allocate your resources.