Whole life insurance is a type of life insurance that builds guaranteed cash value savings, a guaranteed death benefit and offers a guaranteed level premium payment (on most policy types). A whole life policy also matures at age 100, unlike other forms of life insurance. This means that the cash value and the death benefit will be equal when you turn 100.
When cash values are credited to your policy, you may leave them in the policy to accumulate interest. This is the default option on whole life insurance policies. Interest rates credited to the cash value of the policy are based on income producing assets like bonds, large-cap dividend-paying stock, or mortgages (or other real estate investments).
Some whole life policies allow you to withdraw the cash value up to certain limits. These policies pay dividends to the policy. Withdrawals on whole life policies are limited to the accrued dividends. When you withdraw dividends from the policy, you must surrender any cash value and death benefit associated with the dividend. The dividend's value is the same as the cash value so you are essentially withdrawing cash value from the policy.
You may borrow against the value of your policy. Policy loans work similar to home equity loans in that you are taking out a loan against the value of the cash value available in the policy. Unlike a traditional loan, however, there are no loan applications. Instead, the loan is fully secured by the cash value in the policy. The insurer charges interest on the loan, which is taken out of the cash value when the policy death benefit is paid (unless the loan interest along with the loan is repaid).
Some whole life insurance policies allow you to invest a portion of the premiums paid to the policy into mutual funds. A mutual fund is a collection of stocks, and sometimes bonds, that share a common investment objective. Whole life policies that allow such investments guarantee a minimum amount of cash value in the policy which is invested in the company's fixed interest account. Only a portion of the policy's cash value (typically dividend payments) are allowed to be invested into mutual funds.