What is Traditional Whole Life Policy?

A traditional whole life policy is a type of life insurance contract that provides for insurance coverage of the contract holder for his/her entire life. Unlike term life insurance, which covers the contract holder until a specified age limit, a traditional whole life policy never runs out.

Upon the inevitable death of the contract holder, the insurance payout is made to the contract's beneficiaries. These policies also include an investment component, which accumulates a cash value that the policyholder can withdraw or borrow against when they need funds.

Understanding Traditional Whole Life Policy

A traditional whole life insurance policy provides the policyholder with a guaranteed amount to pass on to his/her beneficiaries, regardless of how long he/she lives, provided the contract is maintained. Most policies also offer a withdrawal clause, which allows the contract holder to cancel his/her coverage and receive a cash surrender value.

Key Takeaways

  • Traditional whole life insurance policies have a cash value, unlike term life policies. 
  • Term life insurance policies are only good for a specific set of years (usually 15, 20, or 30), depending on the policy. 
  • Traditional whole life insurance is good for the lifetime of the policyholder.
  • There is an investment component to whole term life insurance, and policyholders may borrow money from their policies. 

Traditional whole life policy provides policyholders with the ability to accumulate wealth as regular premium payments cover insurance costs. These payments also contribute to equity growth in a savings account. Dividends, or interest, can build up in this account, tax-deferred. As indicated by its name, whole life insurance protects an individual for his entire life. This is the most basic type of whole life insurance, also known as straight life or permanent whole life insurance.

Traditional whole life insurance is usually more expensive than buying a term life policy.

History of Traditional Whole Life Policies

For 30 years, from 1940 to 1970, whole life insurance was prevalent. Policies secured income for the families of the insured in the event of the untimely death and helped to subsidize retirement planning.

In 1982, the Tax Equity and Fiscal Responsibility Act (TEFRA) became law, and several banks and insurance companies became interest-sensitive. Individuals questioned putting money in whole life insurance instead of investing in the market, where return rates were upwards of 10 to 12 percent. The majority of individuals, at that time, began investing in the stock market and term life insurance.

Traditional Whole Life Policies vs. Term Life Policies

Whole life policies have a living benefit and cash value that can be borrowed against or withdrawn. However, withdrawals are taxed at the ordinary tax rate, and loans, if unpaid at time of death, will result in lower death benefits for the beneficiaries.

Term life is temporary insurance that provides insurance for the policyholder and offers only a death benefit. While whole life insurance provides coverage for the entire life of the policyholder, term life insurance has a fixed period where the premium remains level. Eventually, the premium increases each year to the point it becomes unpayable, or the policy terminates.