Originally, life insurance companies only offered one kind of life insurance: term life.
But over time people began to think that maybe term life wasn't the best deal for everybody.
Insurance companies responded with a product now known as "whole life".
Whole life, as its name implies, is life insurance designed to be permanent, or at least far longer-lasting than term life.
Insurance companies earn substantially more in whole life premiums than they do in term premiums for the same amount of death benefit coverage, and these premiums will often be paid to the company for a much longer time period.
Furthermore, the life insurance companies sweeten the whole life policy by offering cash back to the insured in the form of dividends from returns on company investments (made using part of the premiums).
These dividends build up inside the policy as a "cash value".
There are no income taxes paid on this "cash value" as it grows.
If this cash value is borrowed out of the policy, it can be taxed as income, but only depending on how much is taken out and what the insured's income tax bracket is.
Investopedia comments, "As the most basic form of cash-value life insurance, whole life insurance is a way to accumulate wealth as regular premiums pay insurance costs and contribute to equity growth in a savings account where dividends or interest is allowed to build-up tax-deferred.
" The cash value in whole life policies builds very slowly at first, for in the early years most of the premiums go to financing the overhead of office administration, employee salaries, and writing agent commission.
Over time, a whole life policy's cash value will grow faster.
If the policy is kept long enough (as it's intended to be), eventually the insured can choose to have the policy pay for itself; the amount of dividend returns exceeds the amount of premiums owed.
Most whole life policies will actually expire before the insured dies, should the insured live long enough.
When this happens, they no longer have to pay premiums and they receive the cash value still remaining (if they have borrowed any out); this typically means the death benefit, for at this point that will likely be greater than the original face amount as cash value adds into that total.
For instance, one of insurance giant MetLife's biggest life insurance products is its "L-98" policy.
If the insured reaches her 98th birthday, MetLife terminates the policy and gives her a check for the full amount of the death benefit.
These policies are priced so that the life insurance company figures it will make a profit and cover all expenses should an insured outlive the "death benefit deadline".
They are sold as "forced savings vessels" for people.
While agents tout this as a blessing, whole life has come under increasingly heavy criticism as people grow more sophisticated about insurance and investments.
Whole life policies are very expensive compared to their term face value counterparts, for one thing.
For another thing, their returns are not high compared to what people can earn by investing even conservatively in the stock market.
This has led to an anti-whole life philosophy (and competitor selling strategy) called "buy term and invest the difference".
This means take the difference between a whole life premium and a term policy premium of equal face value for the same person and invest that amount of money in the stock market each month.
Many life insurance companies are also financial services companies and they can offer vessels like mutual funds to help people accomplish this.
The whole life advocates contend that that is a great idea, but only if people are disciplined; whole life "forces" people to "invest", thus protecting them from lapses in discipline, they say.
Critics also contend that a sound financial plan does not include a lifetime of life insurance, but uses it only temporarily, and thus only cheap term should be used for life insurance.
In response, life insurance companies have come up "no-load whole life".
This is whole life with substantially lower premiums, a faster cash value build-up, and a one-time up-front fee to buy the policy.
But these policies are usually only sold through brokers, they come with hardly any customer service, and they are still criticized for lower returns than the market.