For most, their first experience with life insurance is through a visit with a corporate benefits manager or an insurance agent that represents the company that underwrites an employer's benefits package. The benefits manager or agent will throw around confusing terms like whole life, term life, or the exotic universal life insurance policies. The employee is given fifteen minutes to have medical, dental, 401K or 403B and ancillary benefits explained to them. The agent of benefits manager then allows the employee to ask questions that can have resounding financial implications on their families  safety with the remainder of the allotted time. So, what is whole life insurance and why should I have it in my financial portfolio?

      Significance
1. Whole life insurance is exactly what the name implies. Whole life insurance is insurance that, as long as the premiums are paid, will protect the insured for their entire life. Whole life insurance is necessary in every person's financial portfolio. The death benefits are paid to the beneficiary tax-free and can be used at the beneficiary's discretion. If the policy is purchased at a young age, the premiums are often extremely affordable and regardless of changes in the individual's health, the premiums will never increase.

      Function
2. Here is how it works. An individual purchases a policy at 25 years old the day after he gets married. The life insurance underwriter will look at that the policy applicant's risk pool, a big word for saying that person's lifestyle habits, and determine his life expectancy. Let us assume in this illustration that our newlywed has a life expectancy of 76 years. The life insurance company will extrapolate out the number of years the person has to live and will calculate exactly how much he will have to pay to create a cash value equal to the amount of coverage he purchases---Mr. New Lee Wed purchases 25K worth of coverage.
      Life Expectancy (76) - Purchase Age (25) = Equal Premium Cash Value Age (51)
      From the equation Mr. Wed, it will take him 51 years to pay enough premiums to the policy to equal the 25K
      Cash Value (25K) / Premium Cash Value Age (51) = Premium Payment per year (490.20)
      Mr. Wed's yearly premium will be roughly $500 dollars a year. The insurance company has to make some money so they add a few extra dollars to the premium to cover their costs and make a profit.
      Over the years, as Mr. Wed pays the premium, the policy will begin to accrue a cash value that will earn interest---tax-free. The interest rates on whole life policies are often very competitive, too.

      Considerations
3. Whole life policies are the most expensive of the three types of insurance: whole life, term life and universal life. However, it also the most secure and stable of the three and provides entire life coverage. Term life is only issued for a term of a person's life and has to be renewed at the end of them to continue coverage and term life does not accrue a cash value. At the time the insured renews, they are older and may have adverse health issues that can cause the new term policy to be financially too expensive. Universal life on the other hand is most often tied to a variable, read stock market, underlying contract. The cash value will fluctuate with the stock market and the death benefit does not necessarily reflect what the person originally paid for---buyer beware on universal products.

      Benefits
4. The insured is protected for the entirety of their lives. The building cash value may be borrowed against at anytime. A whole life policy is a great gift to purchase for children as a savings instrument or college fund. However, 529 plans may be better suited for college savings rather than a whole life policy.

      Warning
5. Beware in a loan situation that the policy does not default. The insured could possibly be at that time unable to get another policy applied or if they do get a new policy may not be able to afford the premium. Although the policy does allow borrowing, consult a financial expert before proceeding with the loan. Some states protect the cash value of insurance policies in divorce or bankruptcy proceedings.

Source: www.ehow.com/about_4568553_benefits-whole-life-insurance.html