Life insurance is meant to financially protect those you leave behind, but with so many types of insurance and so many different providers, it can be difficult to know which policy is right for you.

Whole life insurance is one coverage option you may want to consider depending on your family's situation, what you can afford and your specific insurance needs. Here's what you need to know about whole life insurance.

What Is Whole Life Insurance?

Whole life is a form of permanent life insurance. Once you get a policy, the coverage never expires as long as you continue to pay your premiums.

Similar to other forms of life insurance, you apply for a policy with an insurer and provide your medical information and health history as part of the application process. In most cases, you'll also have to undergo a health exam in which a nurse or other health professional will take your blood pressure, check your weight and height and collect a urine and blood sample. Once the insurance company receives your exam results and reviews your entire application, it will decide whether to approve you for a policy.

Coverage amounts will differ depending on your risk level to an insurer, but you could be approved for anywhere from $25,000 to $1 million or more. Your approved coverage amount will equal the death benefit, or lump-sum payment, that your loved ones receive after you pass away. If you're approved for a $1 million policy, for example, your beneficiaries should expect to receive a $1 million death benefit.

Understanding the Difference Between Whole vs. Term Life

A key aspect of understanding "What is whole life insurance?" is knowing how it differs from term life insurance. Whole life is different from term life insurance in two main ways: it's permanent and it includes a cash value component.

Term life insurance is only in place for a set period of time, typically anywhere from five to 30 years. Since this form of life insurance expires, it is usually much cheaper than whole life insurance.

One analysis found that the average 2021 annual premium for whole life insurance for a woman or man in their 50s was $8,347 and $9,875, respectively. Rates jumped significantly for older policyholders. Women in their 70s paid an average 2021 annual premium of $23,678, and men in the same age group paid $27,137.

In addition to being cheaper, term life insurance doesn't include an investment portion — also known as cash value. With whole life insurance, a portion of the premiums you pay will be used to pay out a death benefit to your beneficiaries. The other portion of your premium, the cash value component, will be invested in the market.

The cash value component of your policy increases over time. You actually have the ability to access this money while you're still alive and can use it in several ways to pay down your premiums, take out a loan against your policy or partially or fully withdraw money from your policy. However, if you take out a loan against your policy, you'll have to pay it back with interest. If you don't repay it, the amount of the loan will be deducted from the guaranteed death benefit that your beneficiaries receive.

The same rule applies to withdrawing money from your policy. The amount you withdraw will reduce the death benefit by that same figure. For example, if you withdraw $40,000 from your policy, your insurer could reduce your policy's death benefit by $40,000.

It's also important to know that, although whole life insurance is permanent, you can surrender the policy if you decide you no longer want to pay the high premiums. However, if you exercise this option, you'll likely have to pay a surrender charge and you'll receive what's known as the policy's cash surrender value, or the cash value that has accumulated minus the surrender charge. You'll also have to pay income taxes on any investment gain of the cash value, which is equal to the dollar amount the invested portion of the cash value has grown over the life of your policy.

Is a Whole Life Policy Right for You?

Deciding whether whole life insurance is right for you will largely come down to what you can afford to pay and what your life insurance needs are.

Generally, people who have a high income, a substantial net worth or a large estate choose to get whole life insurance because they can afford the expensive annual premiums. They often use the policy to fund a trust that will pass along assets to their heirs or beneficiaries. They may also use the policy to help their heirs pay the estate taxes associated with their inheritance. This way, their loved ones don't have to use a portion of their inheritance to pay these taxes.

Younger, healthier people often opt for a term life policy because the annual premiums are much more affordable. Term life insurance also provides coverage during the most financially crucial period of a person's life — when they may have young children and be in their highest-earning years. In this case, their family would suffer significant financial hardship if they passed away unexpectedly and without a plan in place. If this is your situation and you can't afford a four- or five-figure annual premium, it may be best to apply for term life rather than whole life insurance.

However, if you can afford the premiums and like the flexibility of being able to access a portion of your life insurance proceeds while you're still alive, then whole life insurance may be a worthwhile investment. Just keep in mind that whether you decide to apply for a whole or term life policy, it's best to try to qualify for a policy when you're younger and healthier. As the rates illustrate, a healthy 50-year-old will pay much less in annual premiums than even a healthy 60- or 70-year-old.

Take the time now to explore all your life insurance options, get rates from different insurers and sign up for a policy that will give your loved ones the financial protection they need.