Whole life insurance has a fixed cost for a death benefit. Once you purchase a policy, the cost of the insurance can never be increased. Your premiums can never change because of the fixed costs. This means, if purchased at a younger age, you will guarantee a low premium for your entire life. The premiums will not increase no matter how old you get.
Whole life policies also build what is called “cash Value”. A fixed amount of every premium you pay goes towards the insurance itself, paying for the mortality cost (death benefit) and administration. The balance then goes into a cash “bucket” and earns interest. The rate of return on the cash value is usually better than you would expect from a savings account or bank CD. The cash balance then grows tax-free until it equals the amount you have put into the policy. Everything that exceeds the premium’s you’ve paid would grow tax-deferred and would be taxable upon withdrawal, unless you take the money out through a policy loan.
Loans are a tax free form of withdrawal. At some point the cash value usually grows large enough that, if you wanted to, you could stop paying your premiums and the interest earnings on the cash value would pay the premiums for you. If you continue to pay into the policy and develop a large cash value balance, you could use the policy to provide you with a supplemental retirement income on a tax-free basis. You can withdraw a tax-free retirement benefit while maintaining the policy so that at your death you complete a legacy plan by leaving a tax-free death benefit distribution to your spouse, children, grandchildren, your church or favorite charity.
