Whole life insurance: permanent coverage with fewer moving parts.

What whole life insurance is

You choose a death benefit and pay a premium that is usually set when the policy is issued and designed not to increase. If you pass away while the policy is in force, the carrier pays the death benefit to your beneficiaries. There is no term that expires.

Part of each premium goes toward a cash value inside the policy. The contract spells out how the guaranteed cash value grows over time. In the early years, most of the premium goes to the cost of coverage and policy expenses, so cash value usually builds slowly at first.

Guaranteed values and dividends

Whole life policies show guaranteed values: the premium, the death benefit, and the cash value schedule set by the contract. Some policies, often called participating policies, may also pay dividends. Dividends are not guaranteed. They depend on the carrier's results and are declared by the carrier each year.

If you see projections that include dividends, ask to see the guaranteed column too, and compare the two.

Cash value, loans, and surrender

You may be able to borrow against the cash value. Policy loans accrue interest, and any unpaid loan balance reduces the death benefit and the cash value. If you surrender (cancel) the policy, you receive the cash surrender value, which may be less than the premiums paid, especially in the early years. Loans, withdrawals, and surrenders can have tax consequences, so talk to a tax professional about your situation.

Whole life vs. term and IUL

Term life covers a set number of years and usually costs much less for the same death benefit. IUL is also permanent, but it has flexible premiums and index-linked interest crediting with fewer guarantees. Whole life generally trades flexibility and upside for predictability. Many families combine a term policy for large, temporary needs with a smaller permanent policy.