What Is Whole Life Insurance?

How Does Whole Life Insurance Work? | Northwestern Mutual
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Life Insurance
How Does Whole Life Insurance Work?
Lynn Leritz
Apr 07, 2026
Whole life insurance can become one of the most flexible parts of your financial plan.
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Key takeaways
Whole life insurance provides lifelong coverage, guaranteeing a financial benefit for your family after your death (as long as premiums are paid).
Over the years as you pay premiums, your policy builds cash value that can be used for any reason.
Your premiums will stay the same until you have finished paying for your policy.
Lynn Leritz is a vice president of Insurance Solutions.
You’ve come a long way since ramen noodle dinners in your college dorm room. Maybe you’re married or have a partner. Perhaps you’ve purchased a home. You might even have kids relying on you. If so, the topic of life insurance has probably come up in a conversation—or at least popped into your mind.
As you start researching life insurance policies, you’ll likely come across two of the most common: term life and whole life insurance . Term life insurance , which covers you for a limited time frame, might catch your eye with its lower premiums. But while premiums for whole life insurance can be higher, there are many reasons why it might make sense for your family.
Let’s take a closer look at how this powerful form of coverage called “whole life insurance” works and the benefits it can offer.
How does whole life insurance work?
Whole life insurance is a type of permanent life insurance , which means it doesn’t have an end date—it covers you for your entire lifetime. (In contrast, term life insurance expires after a certain number of years.)
With whole life insurance, as you pay premiums, your policy builds equity, which is your accumulated cash value . This tax-advantaged money can be used any time and for any reason—to pay for a child’s wedding or college expenses, to remodel your home, to start a business or to supplement retirement income . 1
Term life insurance, on the other hand, doesn’t accrue cash value. You pay your premiums, and if the term of your policy ends while you’re still alive—called outliving your policy —that’s it. You’ll need to purchase a new policy, likely at a higher cost, to have coverage.
Characteristics of whole life policies
If you’re still unsure about whether whole life insurance belongs in your financial plan , consider these points:
Your coverage never expires.
Whole life insurance doesn’t last only for a term. Instead, it covers your entire life. That’s one of the biggest differences in term life insurance vs. whole life insurance . As long as you pay your premiums, your death benefit is guaranteed for life, generally tax-free , regardless of when you die.
Your premiums remain level.
The cost of whole life insurance premiums will stay the same 2 until you’ve finished paying for your policy, which happens either when you get to a certain age or after a set number of years. Once you reach that point, your coverage will remain in place, and you won’t have to make any more payments. It’s sort of like paying off your mortgage.
Your policy is eligible to earn dividends.
At Northwestern Mutual, the cost of our insurance is based on certain assumptions, like how many death claims we expect to pay in a year. Whenever outcomes are better than what we assumed, we may pay a dividend to our policyholders. While a dividend isn’t guaranteed, we’re proud that we’ve paid one every year since 1872.
With whole life insurance, you get to decide how your dividends will be used. Here are some of the choices:
Purchase additional insurance, which can increase your death benefit and accumulated cash value more quickly than your policy’s original guarantees. When you use your dividend to purchase additional insurance, it sets a new level of guarantee from which the policy’s values can’t fall from one year to the next
Reduce the amount of premium you owe each year. 3
Take it in cash to use for anything you want. 3
Your Northwestern Mutual financial advisor can help you figure out the best option for you.
You’ll accumulate cash value.
Your policy will accumulate cash value that’s guaranteed to grow over time and isn’t tied to the stock market—meaning it won’t decrease after a drop in stock prices. And if you choose to use dividends to buy additional insurance, your accumulated cash value and death benefit can increase even faster, compounding over time.
You can access this cash value at any time for any purpose, and you’re typically able to get the money quickly. 1 When accessing your cash value, you have a few options to consider.
Take a loan against your policy. 4 You can take a loan against your policy from the insurance company. Repayment of the loan is flexible, but interest will accrue. If you die with a loan against the policy, your death benefit will be reduced by the amount of the loan. Another option is to use your policy as collateral for a loan from your bank. This may be a good option if you have a financial emergency or for larger, infrequent needs, such as remodeling a home.
Surrender a portion of your policy. When you surrender your policy, you’ll no longer have your insurance. In many cases, when people need to access their cash value and no longer need their full death benefit, they surrender a portion of their policy. They keep some life insurance death benefit in place. This can also be helpful from a tax perspective. That’s because when you surrender a policy, you’ll owe ordinary income tax on any cash value above money that you’ve paid in (or “basis”).
Surrender your entire policy. In this case, you can take all the cash value in your policy, but you also surrender all your life insurance. If your cash value is worth more than what you paid in, you’ll owe ordinary income tax on that amount.
If you’re considering tapping into your cash value, your financial advisor can help you think through the best options for your situation.
The insurance company may pay your premiums if you become disabled.
If you have an optional waiver of premium rider on your policy, the company will pay your life insurance premiums if you become disabled. During this time, your cash value will continue to grow without you owing any money for your policy.
You may be able to purchase more insurance without a medical exam.
If you have the optional additional purchase benefit on your policy, you’ll be able to purchase additional insurance without having to take a medical exam or go through a health history review when you rea…

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