You might be surprised to hear this – especially coming from an independent life insurance agent, but I’m not that big a fan of Whole Life Insurance.
…and I created a term vs whole life insurance calculator to illustrate the financial benefits of buying term and investing the rest!
There – I said it and now I’m going to tell you why.
When asking yourself whether you should get term or whole life insurance, let me say that there are some situations when buying a Whole Life policy can be beneficial, but not for most of you. If you happen to be one of the few who should consider this product, you can click here to find out what my picks are for the best whole life insurance companies are!
Many of the top life insurers really push their agents to sell Whole Life, but here at Huntley Wealth – we won’t do that except in very few circumstances.
We believe that Whole Life is a very complicated product and that it really isn’t a great fit for the needs of most Americans. For the average American, you will likely benefit much more by buying a low cost Term life insurance policy.
At Huntley Wealth, we are of the opinion that you can make much more, by investing the cost savings of what you may pay for a Term policy.
Quick Article Guide Is Whole Life Insurance Worth It?
- Term v Whole Life Insurance Comparison
- The Problem with Whole Life Insurance
- Cost Comparison of Term v Whole Life Insurance
- Valid Reasons to Buy Whole Life Insurance
Let’s do a quick review of the two types of policies.
Term Life Insurance
Term pays out death benefits only and is the most basic type of life insurance you can buy. When buying Term, there are only 3 considerations that need be evaluated by a prospective buyer:
• Amount of death benefits (anywhere from $100,000 up to $1,000,000 or more)
• The length of the Term (15, 20, 25 or 30 years)
• Naming your beneficiary
Term is ideal for those who are primarily seeking to use life insurance to cover their income replacement and debts. Term insurance also comes with many Riders such as Return on Premium (where you get a chunk of change paid back to if you survive to the end of the Term) and others.
Most policies also come with a renewable and/or conversion option where you can automatically renew the policy or convert to a Permanent policy.
Whole Life Insurance
Whole Life also provides death benefits and has an additional advantage of a cash value accumulation feature which builds up over time. Many company agents peddle this additional feature as a means to provide a supplemental retirement income. It’s the latter feature that really bumps up the cost of these policies.
The problem with Whole Life Insurance is that in your first year alone, most of the premiums you pay go paying the commission of the agent who sold you the policy – they make a lot more on these Permanent policies than they do on Term policies.
Life insurance salesmen like to talk about the returns on their policies as if they are guaranteed. They are not. Neither are the returns from stocks or bonds, but don’t be misled into thinking that whole life insurance returns are somehow on a different level. Matt Becker, Why Whole Life Insurance is a Bad Investment
The other disadvantage is that the bulk of your premiums go to cover the cost of the death benefits and other administrative fees (many of these fees aren’t transparent), so you don’t reap a lot of benefit for the cash value accumulation in the early years of the policy.
If you surrender the policy during these early years, you aren’t going to collect much money because much of it has been allocated to pay commissions, fees and death benefits.
The agent will likely tell you that the cash value accumulation is tax deferrable and that you can also borrow against the policy which is true. Again, you won’t earn much in the way of financial gain in the cash value accumulation for the first 10 – 15 years!
If you ask the agent selling you the policy how much you will get back for the cash value accumulation segment after 10 years, you’re not likely to get a specific answer. They’ll skirt around the question because it typically takes at least 10 years just to get back to a break-even point.
Let’s look at one example to illustrate how much more a Whole Life Policy could cost.
If a 35 year old healthy, non-smoking male were to buy a 30 year Term policy for $500,000, the cost would be around $39.00 per month or $468.00 per year. This would work to approximately $14,040 dollars spent when the policy expires.
A Whole Life policy, on the other hand, will cost as much as $250 per month (possibly more) or approximately $3,000.00 per year. This means that by the end of 30 years, you will have shelled about $90,000.
Now some of this money would have been invested on your behalf, but will you really see a larger benefit from your whole policy than you would if you invested the annual savings on your Term policy?
It’s likely that you would have been better off investing the $2,353.00 savings elsewhere, earning 6-8% on your investment. Setting up an automatic withdrawal and applying it to other investment vehicles such as a 401(k), and IRA or mutual funds for example may earn you more in the long run.
Many agents like to tout the dual advantage of Whole Life but we feel one advantage cancels out the other out creating a net loss as opposed to a net gain.
We would suggest that before you buy a Whole Life policy you discuss your circumstances with an experienced financial adviser and become better informed about your options before you buy.
However, after having said this, there are a several circumstances when buying Whole Life makes sense, but we believe these are the only valid reasons you should consider Whole Life:
• You have maxed out what you pay into your 401(K) and IRA and are seeking other tax shelter investments
• You have a large estate and want to ensure your heirs have immediate cash to cover estate taxes
• Business purposes
So these and other situations may arise where a Whole Life policy makes sense, but they do not apply to the majority of people.
Get Informed and Call Us Today!
We would be pleased to discuss the pros and cons of both Term and Whole Life Insurance and fill you in on the reasons you need to discuss your options with a savvy financial adviser along with your knowledgeable life insurance agents here at Huntley Wealth.
To learn more about your life insurance choices, phone me at 877 – 443 – 9467 today as I will be happy to answer all your questions!
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