Whole life insurance, explained

Whole life insurance covers you for your whole life, as long as the policy is kept up, and pays a sum to your beneficiaries when you die. Some whole life policies also set a maturity age, an advanced age stated in the policy, and pay the sum to the policyholder if the insured person reaches it. It also builds a cash value over the years, which you can borrow against or take if you give up the policy. For the same amount of cover, it costs more than term life, which covers only a set number of years and has no cash value.

How it works

• The paying period. Some policies are paid for life. Others are “limited pay”: you pay for a set number of years, for example 10 or 20, and the cover continues for life after that.
• The cash value. Part of what you pay builds a value inside the policy. Once three full years of premiums have been paid, the law requires the policy to give you a cash surrender value and other options if you stop paying (Insurance Code Sec. 233(f)).
• Dividends on participating policies. A “participating” policy can share in the insurer’s surplus through dividends. Dividends are not promised. The insurer decides each year whether to pay them and how much.
• Policy loans. Once there is a cash surrender value, the policy must let you borrow up to that value from the insurer, with the policy as security. The policy may also let the insurer defer the loan for up to six months after you apply (Sec. 233(g)). The loan charges interest, and anything unpaid is taken from the payout.
• The grace period. After the first premium, you have 30 days or one month to pay each premium while the policy stays in force (Sec. 233(a)).

Whole life vs term life

Scroll the table sideways for more

See term life insurance.

What can go wrong

• The policy lapses. If a premium is not paid by the end of the grace period and the cash value is not used to keep the policy going, it lapses. You can have it reinstated within three years of the date of default, by giving evidence of insurability the insurer accepts and paying all overdue premiums and any policy debt, with interest. This is not possible once the cash surrender value has been paid to you, or once any extended cover bought with it has run out (Sec. 233(j)).
• Giving it up early costs money. In the first years, the cash surrender value is usually much less than what you have paid, because the early premiums also pay for the cover and the insurer’s costs.
• Buying more than you can keep paying. A whole life policy only works if you keep it for many years. Choose an amount you can keep paying even in a bad year, for example if you lose your job abroad.

Before you sign

Read the illustration. Before you buy, the seller shows a sales illustration of how the policy’s values may grow. The Insurance Commission has set a standard format for these (IC Circular Letter 23-2005). An illustration has two kinds of numbers: guaranteed values, which the policy promises, and non-guaranteed values, such as future dividends, which depend on how the insurer does. Base your decision on the guaranteed column. The Insurance Code makes it an offence for anyone to give a misleading estimate of dividends (Sec. 371).

Check for a free look period. Where a free look period applies to a product, the Insurance Commission’s rules set its length: 15 days from receiving the policy for cover longer than six months, five days for cover longer than 30 days up to six months, and none for 30 days or less, with a full refund if no claim has been made (IC Insurance Memorandum Circular 2023-01). Ask the insurer whether the policy has one; the policy states it.

Answer the health questions truthfully. Until the policy has been in force for two years during the insured person’s lifetime, counted from issue or the last reinstatement, the insurer can still contest it for concealment or misrepresentation. After that, it cannot (Sec. 48).

This page explains how whole life insurance generally works. It does not describe any company’s product.