Whole Life Insurance · Permanent Coverage

Coverage meant to last as long as you do.

Whole life insurance with level premiums and cash value, laid out plainly: what's guaranteed, what isn't, and what it costs to walk away early.

Quick answer Whole life insurance is permanent life insurance that covers the insured for life, with a premium set level when the policy is issued and cash value that builds over time.

Whole life premiums are set level at issue and can be paid for life or for a set number of years.
Whole life cash value can be borrowed against at the loan rate in the policy, and unpaid loans reduce the death benefit.
Cancelling a whole life policy usually brings a surrender charge in roughly the first seven or eight years, and a surrender or lapse can be taxable.
For the same death benefit, whole life and other cash value coverage costs more than term life in the early years.
Limited-pay whole life stops premiums after a set number of years, while the coverage still lasts for life.

By Sam Alishahi · CA Insurance License #4348151 · Reviewed November 2026 · How this page is researched

Get a Quote Call (877) 711-4545

How it works

You pay more early, so later years are carried

Whole life covers the insured for life. The premium is set level when the policy is issued, so in the early years you pay more than the coverage costs, and that extra builds cash value that helps carry the policy as you get older. Premiums can be scheduled for life or for a set number of years.

Cash value grows slowly at first and can be borrowed against, but loans you haven't repaid come out of the death benefit, and surrendering in the first several years can cost a substantial charge. The California Department of Insurance advises against buying cash value coverage if you may surrender it early. Whole life fits a need you expect to keep for decades, and I show the guaranteed values next to the ones that aren't.

Level premiumSet at issue, and paid for life or for a set number of years.
Cash valueBuilds over time and can be borrowed against, or paid out if you surrender.
DividendsSome companies pay dividends that add to the savings part. Ask what the illustration guarantees.
Policy loansBorrowed at the rate in the policy. Unpaid loans reduce the death benefit.

What I help with

Whole life situations I'm asked about

Term now, permanent later

Checking whether a convertible term policy can become whole life without new health questions.

Leaving money to family

Permanent coverage for an inheritance that doesn't depend on when you die.

Business succession

Lifetime coverage behind a buy-sell agreement or a key person. See details

Someone suggested replacing your policy

Surrender charges, a new contestable period and your current age, weighed before anything is cancelled. See details

Borrowing against a policy

Showing what an outstanding loan does to the death benefit and the cash value.

Protecting income too

Whole life pays at death. Disability income protects earnings while you're alive. See details

Before you call

What underwriters will ask

Having these ready means I can go to market on the first call. The quote form asks for the same things, and anything you don’t know yet can wait.

Start the Quote Form

Purpose: final expenses, an inheritance, a business plan or an estate plan.
Amount: the death benefit you have in mind.
Premium schedule: pay for life, or pay up over a set number of years.
Budget: a yearly amount you can keep paying for decades.
Existing policies: any term you could convert and any cash value policy you own.
Ownership: whether you, a spouse, a trust or a business will own the policy.

The 7-pay limit that changes how cash comes out

Two federal tests decide how cash comes out of a whole life policy: 26 U.S.C. 7702 (does it count as life insurance for tax purposes) and Section 7702A (is it a modified endowment contract, or MEC).

Section 7702 requires a contract to meet the cash value accumulation test (the cash surrender value may never exceed the net single premium needed at that time to fund future benefits), or to meet the guideline premium requirements and also fall within the cash value corridor (the death benefit never less than an applicable percentage of the cash surrender value). If it fails, the income on the contract each taxable year is treated as ordinary income to the policyholder.

Section 7702A applies the 7-pay test to contracts entered into on or after June 21, 1988. A contract becomes a MEC if the amount paid at any time in the first seven contract years exceeds the net level premiums that would have been paid by then for a policy paid up after seven level annual premiums. Three related rules:

A material change, which generally includes a death benefit increase, is treated as a new contract entered into on the day the change takes effect.
A reduction in benefits within the first seven contract years is tested as if the policy had been issued at the reduced level.
Distributions made within 2 years before the failure are treated as made in anticipation of it.

For a MEC, 26 U.S.C. 72(e)(10) makes loans, pledges and withdrawals taxable first to the extent of income on the contract. Section 72(v) adds a 10 percent additional tax on the part included in gross income, except for distributions made on or after age 59½, attributable to becoming disabled, or part of a series of substantially equal periodic payments (at least annually) for your life or life expectancy, or joint lives with your beneficiary. Before adding a lump sum or lowering the face amount, ask the insurer to confirm in writing whether the change would create a MEC, and ask a tax professional about the tax effect.

Loans, withdrawals and surrender on a non-MEC policy

For a life insurance contract that is not a MEC, 26 U.S.C. 72(e)(5) switches off two rules: the one that treats a policy loan or pledge as an amount received, and the income-first ordering. An amount not received as an annuity is included in income only to the extent it exceeds your investment in the contract. In plain terms, a non-MEC withdrawal comes out of basis first.

A full surrender is different. IRS Publication 525 says that if you surrender a life insurance policy for cash, you include in income any proceeds that are more than the cost of the policy. In most cases, your cost (your investment in the contract) is:

the total premiums you paid for the policy,
less any refunded premiums, rebates or dividends that weren't included in your income,
less any unrepaid loans that weren't included in your income.

Publication 525 says you should receive a Form 1099-R showing the total proceeds and the taxable part, and that these amounts are reported on lines 5a and 5b of Form 1040 or 1040-SR.

Before you borrow against or surrender a policy, ask the insurer for an in-force illustration and a written statement of your cost basis and loan balance. I describe the rules here, not how they apply to your return, so ask a tax professional before you act.

If premiums stop: nonforfeiture options

For policies delivered or issued for delivery in California (with exceptions in Section 10165), Insurance Code Section 10160 sets out what happens if you stop paying:

Paid-up benefit. If a premium is in default after at least one full year of premiums, you can request a paid-up nonforfeiture benefit, on a plan stipulated in the policy, no later than 60 days after the due date of the premium in default.
Cash surrender value. After three full years of premiums on ordinary insurance (five on industrial), surrendering within 60 days after that due date gets you a cash surrender value instead.
Default choice. Unless you elect another available option within those 60 days, the paid-up benefit specified in the policy takes effect as the policy states.
Later surrender. A policy that is fully paid up, or continued under a paid-up benefit that took effect on or after the third policy anniversary (fifth for industrial), can be surrendered for its cash value within 30 days after any policy anniversary.
Payment timing. The insurer may defer paying a cash surrender value for up to six months after you demand it.

Most policies must also state the mortality table and interest rate used and show cash surrender values and paid-up benefits for each anniversary in the first 20 policy years (or the term, if shorter). That table assumes no dividends, paid-up additions or loans; the policy must explain how additions or loans change the values.

Before you skip a premium, read that table and ask the insurer which paid-up plan your policy names. Lapse notice rules are on California's free look and lapse notice page, and other states' grace periods are on our state-by-state grace period table. Nonforfeiture rules outside California vary by state.

Selling a policy: life settlement rules

A life settlement is a sale of the policy to a third party. California Insurance Code Section 10113.1(k) defines it as a written agreement between a provider and an owner paying less than the expected death benefit, with a minimum value greater than any cash surrender value or accelerated death benefit available when the owner applies.

Two-year bar. Section 10113.3(m) bars a settlement during the two years after the policy is issued. Exceptions include certain converted policies and independent evidence that, within those two years, the owner or insured became terminally ill, or the owner's spouse died, the owner divorced, retired from full-time employment, became disabled so as to prevent full-time employment, was found bankrupt or insolvent by court order, or sold a closely held corporation interest under a buyout agreement.
Written disclosures at application. Under Section 10113.2(d), the provider and broker must give signed disclosures that alternatives exist, proceeds may be taxable, reachable by creditors and affect public assistance, conversion and waiver-of-premium rights may be lost, and the insured's ability to buy coverage later may be limited. The broker represents only the owner, as a fiduciary.
Price breakdown. Under Section 10113.2(e), before the contract is signed the provider must give the owner a document showing the gross purchase price, the owner's share and the broker's share.
Right to rescind. The owner can rescind within 30 days after all parties sign and the disclosures are received, or 15 days after receiving the proceeds, whichever is sooner, by giving notice and repaying the proceeds plus any premiums, loans and loan interest the provider paid.
Payment and contact. Proceeds go out within three business days after the provider receives the insurer's acknowledgment of the transfer. Contact with the insured to check health or address is limited to once every three months (monthly if life expectancy is one year or less).

Settlement rules vary by state. For an old policy, start with how to locate it and get its current values.

Questions

Whole life, answered

How is whole life different from term?

Term covers a set period and usually has no cash value. Whole life covers you for life, with a level premium and cash value. For the same death benefit, cash value coverage costs more than term in the early years.

How is whole life different from universal life?

Both are cash value insurance. With whole life you typically pay premiums on a set schedule. Universal life lets you choose a flexible payment pattern, as long as you pay enough to keep the policy in force.

Can I borrow from a whole life policy?

Yes. The cash value can secure a loan at the interest rate stated in the policy. Whatever is still owed is subtracted from the death benefit, or from what you'd receive if you surrender.

What happens if I cancel a whole life policy?

You may receive the cash value minus any loans, but a surrender charge usually applies in roughly the first seven or eight years and can be substantial. A surrender or lapse can also be taxable, so talk to a tax advisor first.

What is limited-pay whole life?

A whole life policy whose premiums stop after a set number of years instead of continuing for life. The coverage itself still lasts for life.

Should I replace my old whole life policy?

Be careful. A new policy can bring new start-up costs, a new contestable period of one or two years and a premium based on your current age. Your current company may be able to change the policy you have, so I ask there first. In California, an agent must tell you whether a sale involves replacing a policy.

Do you offer whole life insurance outside California?

Yes. Clients across the country send the same quote form. Sam Alishahi is licensed in all 50 states and Washington, DC and places policies there directly. The shopping across carriers works the same way. Rules, minimums and markets differ by state — see insurance requirements by state.

Official sources

Often placed alongside this

Coverage

Life insurance

Term and permanent life, disability and mortgage protection.

See coverage Question

What is key person insurance?

Life or disability coverage a business owns on an owner or essential employee, with the business as beneficiary.

Read the answer Tool

Coverage review

Upload your declarations page; see what it covers, what to double-check and what it leaves out.

Review my policy Coverage

Disability insurance

Income protection if illness or injury keeps you from working.

See coverage

By state: Insurance requirements by state

Whole life insurance

Tell me what it has to outlast.

The purpose, a rough amount and how long you'd like to pay premiums are enough to start.

Get a Quote Call (877) 711-4545

Alishahi Insurance · Saman Alishahi, independent insurance broker, California License #4348151. General information, not a quote or a promise of coverage; coverage depends on underwriting and the terms, conditions and exclusions of the policy actually issued.

Get a quote

Tell me how to reach you. I’ll take it from there.

Takes about 30 seconds. Your next step comes by email, and you get an update at every step until your quotes are ready.

(877) 711-4545

Answered 24/7 · CA License #4348151

Full name

Mobile phone

ZIP (optional)

Anything I should know? (optional)

Only your name, phone and email are required; every question here is optional. This is a request for insurance: Alishahi Insurance (Saman Alishahi, licensed insurance agent) will contact you about it by email, and by text if you check the box. Sending this form doesn’t bind coverage; coverage starts only when it’s confirmed in writing.

Not shopping yet?

Get a reminder before your renewal.

Tell me when your policy renews and I’ll email you about six weeks before, when it’s worth comparing. One email, no calls.