A guide to types of whole life insurance

As you consider ways to secure your loved ones' financial futures, you'll likely find that whole life insurance stands out for its stability, enduring protection and longevity. It's like a four-season tent that shelters your family from the elements trip after trip, year after year.

Just as you'd compare tent models to find the best fit for your long-term camping needs, it's smart to analyze your whole life insurance options so you get the coverage that's right for you. But researching any unfamiliar product requires getting up to speed on the basics and then discovering what additional features you find most compelling.

Let's take a look at the core features of all whole life policies and examine three specialized types and who they're best for. We'll also discuss different types of premium payment structures to help you choose the one that best suits your circumstances.

All types of whole life insurance have four key features.

1. Fixed premiums. The amount you pay for coverage is locked in when you buy your policy. Though you'll get older and your health may change, your premiums won't increase.

2. A guaranteed death benefit. Your coverage doesn't expire when you reach a certain age. It lasts a lifetime as long as your premiums are paid. The death benefit payout is typically income tax-free, providing your loved ones or favorite charities with financial security after you're gone.

Learn more about the taxability of life insurance

3. Guaranteed cash value accumulation. A portion of each premium payment goes toward building your policy's cash value, which can become a source of loans, withdrawals or premium payments should you need it. Cash value typically earns a guaranteed rate and grows tax-deferred.

Dive deeper into how the cash value of life insurance works

4. The potential for dividends. Whole life insurance often earns dividends, or money an insurance company distributes to eligible policyholders and is based on company performance. You can receive dividends in cash or use them to pay premiums, purchase additional insurance, add to the cash value and minimize loan payments borrowed against the contract.

Read more about Thrivent's history of dividends

Basic whole life insurance is best for people who want no-frills permanent coverage. But you may want to consider other types of whole life insurance that offer additional features and benefit the people covered in specific situations.

In addition to traditional whole life insurance, there are three specialized types: joint, survivorship and children's whole life.

A joint life insurance policy insures two lives—typically, spouses or business partners—under one policy and pays one death benefit. In the case of "first-to-die" joint life insurance, the insurer pays a benefit after the death of the first insured. People often choose this when it's most important to have the death benefit available to help the remaining person temporarily cover income lost. It's also usually cheaper than buying two policies that pay out the same death benefit.

First-to-die joint life insurance isn't commonly used, but it can make sense if your main goal is to safeguard two people so that whichever spouse or business partner survives can have extra financial security for a time. It may be a consideration if you have two strong income earners and no dependents or heirs or if you have a specific business need for this kind of coverage. You'll likely want to compare it to the survivorship option to find what best fits your situation.

Survivorship whole life, also called "second-to-die" life insurance, also insures two lives with one premium. Instead of paying one death benefit after the first person dies, it pays one death benefit after both people die. These premiums also can be lower than two individual policies, which could help you get more coverage for your money.

Second-to-die life insurance can be a good choice when beneficiaries primarily need financial security after the second person dies—to cover estate taxes or to execute a business succession plan, for example. It may not be right for younger people with limited resources or couples just starting to raise a family since the payout doesn't come until you're both gone and therefore doesn't help replace income or cover expenses when you may need it most.

Whole life insurance for children, also called juvenile life insurance, is purchased for a child younger than 18. It offers a death benefit that parents can use for expenses if the child dies while still young, but most people use it to establish permanent coverage for their child early. Minors can carry their whole life coverage into adulthood. This can be a wise move because life insurance rates typically increase with age and health problems. Locking in premiums while young and healthy can ensure long-term affordable coverage.

The policy also offers an early start at the potential for building cash value, which your child could one day borrow or withdraw to use for a major expense, like college or a down payment on a home.

Selecting whole life insurance that focuses on benefitting certain people isn't the only way to customize your coverage. Once you find the right type of life insurance, you can consider the best way to fund it—by paying premiums over a lifetime, for a limited time or all at once upfront.

If you choose ongoing premiums, you'll pay a fixed amount on a schedule that works for you: monthly, quarterly, semiannually or annually.

• Advantages: Premium payments may be lower since you're paying them over a longer term. The policy has little risk of becoming classified as a modified endowment contract (MEC) if you stick to the payment schedule over the first seven years so your policy meets the seven-pay test. With a non-MEC, loans and withdrawals are considered to come from your premiums and are not taxed. With a MEC, they're considered to come from your earnings, and they are taxed. It's important to understand MEC risk if you want to access your cash value tax free.
  
• Disadvantages: Cash value won't accumulate as quickly, and you may pay premiums throughout retirement.

Also called limited pay whole life, this policy structure allows you to pay premiums over a set number of years, such as 10 or 20.

• Advantages: Cash value accumulates faster compared to a policy with ongoing premiums. The policy is fully funded sooner, freeing up cash for other goals.

• Disadvantages: Paying premiums over fewer years increases your annual outlay. A 10-pay policy in particular must be structured to avoid overpaying premiums during the first seven years and triggering MEC status. Again, a MEC is not necessarily bad, but rather something to be aware of.

With single premium life insurance, you make one upfront payment for your coverage.

• Advantages: Your monthly budget won't change and your policy won't lapse for nonpayment of premiums. Your policy will have a high cash value from day one.

• Disadvantages: You'll need a large lump sum. Many families can't afford a major outlay or have their savings earmarked for another purpose. Also, the policy automatically will be considered a MEC since it won't meet the seven-pay test.