A straight life insurance policy is more commonly known as whole life insurance since it’s designed to last the policyholder’s lifetime. The premium does not change and beneficiaries typically receive a death benefit after the policyholder dies. That said, straight life insurance does give the opportunity to earn cash value, which accumulates interest over time. Bankrate’s insurance editorial team helps you compare life insurance options while explaining how straight life insurance operates and pays out.
What is a straight life insurance policy?
You may see straight life insurance referred to as whole life insurance, but it’s primarily defined by two important features. First, straight life insurance policies include lifelong coverage to a maximum age range of 95 to 121. Second, this policy type also accumulates cash value, and you may be eligible to earn dividends if you purchase a participating policy from a mutual insurer.
With a cash value policy, every time you pay your premium, a portion goes towards maintaining your life insurance policy, and the rest goes to the cash value component. The cash value in straight life grows at a guaranteed minimum interest rate. You can access these funds through a loan and typically borrow up to 90 percent of the value.
If you no longer need the life insurance, you could also surrender the policy to the life insurance company and receive the cash surrender value upon cancellation. Be aware that there may be fees associated with surrendering the policy, ultimately reducing the total cash value available to you.
Cash value
The cash value in a straight life policy grows at a guaranteed interest rate, and you may have the option to borrow against the amount by taking out a policy loan. However, similar to that of a traditional personal loan, it does accrue interest which is compounded if you don’t pay it back.
Unlike a traditional loan, you aren’t actually required to pay back a life insurance policy loan during your lifetime, but the balance of the loan (and interest charged) would be deducted from the death benefit before your beneficiaries are paid out. If the loan plus interest ever equal the cash value of the loan, the policy could terminate.
Dividends
If your straight life insurance policy is a participating policy, you may receive dividends from the insurer. Dividends are determined by the insurer based on factors such as its investment returns and claims experience. If an insurer has a strong financial year, it is likely to pay dividends to its policyholders, but these are not guaranteed.
If you receive dividends, you have options as to how you would like to receive them. You can request your dividend to be a cash payment from the insurer, and you can use the funds for anything you like. You may also have the option to put the dividends towards paying your insurance premium or purchasing additional insurance coverage, known as paid-up additions (PUAs). These have their own death benefit and cash value, offering even more value to your beneficiaries over time.
Pros and cons of a straight life policy
Straight life insurance can be used as a financial planning tool. It is usually meant for long-term goals and not short-term needs. If you have a short-term life insurance need, term life insurance is usually a better choice. To find out if a straight life policy could be right for you, consider the potential pros and cons of this type of life insurance.
| Pros | Cons |
|---|---|
| Fixed premiums | Typically 10-15 times more expensive than term life insurance |
| Guaranteed cash value growth | Cash value growth is slow |
| Level death benefit | Not ideal for short-term goals |
| Can take a loan or surrender policy for cash value | Accessed cash value not paid back may reduce the death benefit paid to the beneficiary |
| Surrender chargers can last up to 16 years and are high during the first few years, starting at 100% and slowly declining until 0% |
How does straight life differ from other life insurance types?
Straight life insurance is just one type of life insurance you might consider to meet your needs. However, there are multiple options to consider when going through the process of selecting and buying a life insurance policy.
Straight life policy vs. term life policy
While straight life insurance offers lifelong coverage, term life insurance provides coverage ranging from 10 to 30 years, with some insurers offering up to 40 years. Term is also typically 10 to 15 times cheaper than a whole life policy with the same face amount.
Term life insurance does not offer a cash value component like whole life insurance does, nor is it designed to last your entire life. If you need life insurance to cover a finite financial responsibility, like covering a 30-year mortgage, term life insurance might be the more cost-effective choice. However, if you have a lifelong need, like supporting a child with a disability, straight life insurance might make more sense.
Straight life policy vs. universal life policy
Straight life insurance and universal life are both types of permanent life insurance. The biggest difference between the two types of life insurance is that universal life insurance offers more flexibility than a straight life insurance policy. With universal life insurance, you may be able to decrease or increase your death benefit amount. You can also adjust your premiums up or down, though if you decrease premiums, you have to pay enough to avoid lapsing the policy.
| Feature | Straight life (whole life) | Term life | Universal life |
| Coverage duration | Permanent coverage | Lasts a defined term, typically 10, 20 or 30 years | Permanent coverage |
| Premiums | Level | Level | Offers adjustable premiums |
| Cash value component | Cash value earns a guaranteed minimum interest rate | Does not offer a cash value component | Cash value accumulates at an interest rate set by the insurer |
| Policy loans/withdrawals | Can take a loan or surrender policy for cash value, but cannot withdraw cash value | Not available | Ability to borrow against and withdraw from cash value |
| Flexibility | Fixed premiums and death benefit | Fixed premiums and death benefit | Adjustable premiums and death benefits |
| Cost | Typically more expensive than term policies | Cheapest form of individual life insurance | Typically more expensive than term policies, but premiums can be adjusted |
| Ideal for | Long-term financial planning, estate planning, lifelong needs | Finite needs like income replacement or mortgage protection | Those wanting lifelong coverage with the ability to adjust over time |
How much does a straight life insurance policy cost?
A straight life insurance policy typically costs more than term coverage because the company is expecting to issue a death benefit at some point as long as you pay your premiums. The cash value component of straight life also typically increases the policy cost compared to term. When you apply, the insurer will also evaluate your personal risk factors to help determine the final premium of your individual straight life policy. These factors include:
- Age
- Gender
- Level of coverage
- Health status
- Health history
- Occupation
- Lifestyle (hobbies, tobacco and alcohol use, driving habits, etc.)
Policyholders who are younger and healthy typically lock in lower premiums than those who are older or have chronic medical issues.
How are straight life policies taxed?
Straight life and other forms of permanent life insurance are used as part of financial planning, partially because of the potential tax advantages they provide. The death benefit is paid to the beneficiary once the insured person dies and is typically income tax-free. You can also access the cash value tax-free, as long as the amount is less than your cost basis.
No matter how much cash value a straight life policy holds, the amount continues to grow tax-deferred. If you receive dividends on your straight life policy, they only become taxable if you leave them in the policy to earn interest, in which case, the interest is what is taxed.
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