Types
There are two general types of whole life policies: non participating policies (non par), and participating policies.
Non Participating
All values related to the policy (death benefits, cash surrender values, premiums) are determined at policy issue, for the life of the contract, and cannot be altered after issue.
This means that the insurance company assumes all risk of future performance versus the actuaries' estimates. If future claims are underestimated, the insurance company makes up the difference. On the other hand, if the actuaries' estimates on future death claims are high, the insurance company will retain the difference.
Participating
With a participating policy, the insurance company shares the excess profits (dividends) with the policyholder. The greater the success of the companies performance, the greater the dividend.
Requirements
Whole life insurance typically requires that the owner pay premiums for the life of the policy. There are some arrangements that let the policy be "paid up", which means that no further payments are ever required, in as few as 5 years, or with even a single large premium. Typically if the payor doesn't make a large premium payment at the outset of the life insurance contract, then he is not allowed to begin making them later in the contract life. In contrast, Universal life insurance generally allows more flexibility in premium payment.
Guarantees
The company generally will guarantee that the policy's cash values will increase regardless of the performance of the company or its experience with death claims (again compared to universal life insurance and variable universal life insurance which can increase the costs and decrease the cash values of the policy.)
Liquidity
Cash values are considered liquid enough to be used for investment capital, but only if the owner is financially healthy enough to continue making premium payments. Cash value access is tax free up to the point of total premiums paid, and the rest may be accessed tax free in the form of policy loans. If the policy lapses, taxes would be due on outstanding loans.
Performance
Internal rates of return for participating policies may be much better than universal life and interest sensitive whole life because their cash values are invested in the money market and bonds, while par whole life cash values are invested in the life insurance company and its general account, which may be in real estate and the stock market. Variable universal life insurance may outperform whole life because the owner can direct investments in sub-accounts that may do better. If an owner desires a conservative position for his cash values, par whole life is indicated.
Summary
The primary advantages of whole life are guaranteed death benefit, guaranteed cash values, fixed and known annual premiums, access to cash values, and the fact that mortality and expense charges will not reduce the cash value shown in the policy. The primary disadvantages of whole life are premium inflexibility, and the internal rate of return in the policy may not be competitive with other savings alternatives on a tax free basis.