Whole Life Death Benefit

The dollar amount of the death benefit is typically specified in the policy contract. But it can be changed in some instances.

Some policies are eligible for dividend payments, and the policyholder may elect to use the dividends to buy paid-up additions to the policy, which will increase the amount paid at the time of death. The death benefit can also be affected by certain policy provisions or events. As mentioned before, unpaid policy loans (including accrued interest) reduce the death benefit dollar for dollar.

Alternatively, many insurers offer voluntary riders—for a fee—that secure or guarantee coverage, including the stated death benefit. Two of the most common such riders are the accidental death benefit and waiver of premium riders, which protect the death benefit if the insured becomes disabled or critically or terminally ill and is unable to remit premiums due.

Beneficiaries may also have decisions to make about how the death benefit is paid. The default option is to receive a lump-sum payment. But some policies also allow beneficiaries to choose to get the death benefit in installments, or to convert it to an annuity. An annuity may pay out for a set amount of time until the death benefit is exhausted, or it could pay out for the life of the beneficiary. The death benefit continues to earn interest until it is paid, and that interest may be taxable.

The Bottom Line

Whole life insurance generally has a level premium and death benefit, and provides a guaranteed benefit upon the death of the insured, regardless of when they die. Part of the premiums you pay for a whole life policy go to a savings component known as the cash value. Those funds are invested with a guaranteed return, and after they’ve grown big enough, you can borrow from or withdraw from the cash value, tax-free.

This and the fact that whole life covers you until death (as long as you pay your premiums) offer clear advantages over term life insurance.

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