As an independent life insurance agent here at Huntley Wealth, I am troubled by one major trend we see occurring in the life insurance industry. The problem we encounter time and time again has spurred the great debate – Term vs. Whole Life.
We see far too many life insurance agents needlessly promoting Whole Life to the average American. It is our belief that most Americans would be better off if they purchased a Term policy and invested the difference.
Quick Article Guide to the Great Insurance Scam – Term vs Whole Life
- Financial Advisers Opinions on Whole Life
- Term vs. Whole Life
- Reasons Agents Promote Whole Life
- Why Whole Life is a Bad Investment
- Cost Difference – Whole vs. Term
- 40% Whole Life Cancelled Within 10 Years
- Learn More
We recently ran a survey through the Financial Consulting Group (FCG), the largest association of independently owned financial services, business valuation and accounting firms in North America.
Unbelievably, 80% of the experts polled in FCG said that most Americans are better off buying Term Life insurance and investing the difference, instead of paying a much higher premium for a Whole Life policy.
This message does not seem to be catching on, because according to the American Council of Life Insurers, as many as 63% of all new policies currently being sold are Whole Life.
So basically, high Whole Life sales have become the “great insurance agent scam”!
Now, before I fill you in on why we think those of you contemplating Whole Life should avoid it, I want to be candid. There are absolutely situations where this kind of policy is beneficial – but this applies to only a very small number of people. For the most part, you should avoid Whole Life like the plague!
Here at Huntley Wealth, we feel that most Americans would be better off buying Term insurance than Whole Life. Most people only need life insurance for a portion of their lives because children leave the nest, and many will gradually payoff their mortgage.
It makes more sense to buy a 20 or 30 year Term policy and invest the savings for your retirement through instruments such as a 401(k), an IRA, mutual funds or other investment vehicles.
Why then are so many agents pushing Whole Life rather than selling term? What reasons are these insurance agents using to sell this needless policy to most Americans?
One of the main reasons so many company agents are promoting Whole Life is that many life insurance companies are directing them to do so.
Why would they do this?
The first reason is because any Permanent life insurance policy such as Whole Life, Universal Life or Universal Indexed Life insurance costs a heck of a lot more and, therefore generates a lot more income for both the insurance company and especially the life insurance agent.
The commissions agents make when selling Whole Life are staggering.
Agents will try and tell you that Whole Life is preferential for the following reasons:
• The policy provides pre-retirement income protection• Whole Life produces a good return on investment
Let’s debunk both of these myths right now.
Our answer is no – it does not, and here’s why!
One thing your agent might try to promote as a benefit of buying Whole Life, is that it has a good annual rate of return. They will then try to compare this number with what you might earn if you invested in the market.
These numbers may sound quite good, but what they don’t tell you is these figures do not reflect the actual rate of return – which is different from the internal rate of return!
To project how much money your policy will yield 10, 20 or even 30 years from now, insurance companies calculate the policy’s expected yearly growth. Better known as the “internal rate of return,” your IRR will dramatically change the longer you own the policy and will be a crucial factor for deciding whether it’s smarter to hold on to your policy or shop around for a new one. Find Rate of Return on Whole Life Insurance, Bankrate.com, Christina Couch
This refers to the fees that are charged to administer your policy. Agents won’t tell you how these fees work out quite simply because – most don’t know!
Secondly, they like to promote the idea that the cash value accumulation portion of the policy will build up over time.
What they fail to tell you is – for the first 10 -15 years or so, a good chunk of the premium paid goes to cover the death benefits first. You only begin to accumulate a meaningful return on the cash value after approximately 20 years!
So…what does buying this policy mean in terms of actual investment dollars?
To clearly illustrate the problem I have with the rate of return for Whole Life Insurance, I would like to share this well documented example provided by whitecoatinvestor.com:
I recently analyzed a policy for a healthy 30 year old male with a 53 year life expectancy. The guaranteed return on the cash value was less than 2% per year AFTER 5 DECADES. Even if you use the insurance company’s optimistic “projected” values, you’re still looking at a return of less than 5%. In reality, you’ll probably end up with a return of 3-4%. Considering you have to hold on to this “investment” for 5 decades, that doesn’t seem like much compensation. If you have decades to invest, it is far wiser to take more risk with your investments and earn a higher return. An investment in stocks or real estate is likely to provide a return over decades in the 7-12% range. $100,000 invested for 50 years at 3% per year will grow into $438K. If it grows at 9% instead, you’ll end up with $7.4 Million, or 17 times as much money. The rate at which you compound your long-term investments matters, especially over long periods of time.
Another big problem with buying a Whole Life policy is the huge cost differential on what you would pay for premiums. To drive home the point that these policies should typically be avoided, we are using another great example from whitecoatinvestor.com:
A 30 year level premium term life insurance policy with a $1 Million face value bought on a healthy 30 year old runs $680 per year. A similar whole life policy will cost more than 10 times as much, $8-10,000 per year. That is money that cannot be spent on mortgage payments, vacations or invested for retirement.
Another thing to keep in mind is, most American households will not be able to properly afford the death benefits they actually need and may even end up being underinsured because Whole life is so expensive.
A study which was performed by the Society of Actuaries, revealed that 20% of whole life policies are cancelled with the first 3 years, and as many as 39% are cancelled within 10 years of being purchased – because of the extreme cost of maintaining these policies!
If you have an insurance agent pushing Whole Life, don’t walk – run!
Find yourself an independent life insurance agent like the ones you find here at Huntley Wealth because we actively promote affordable Term policies with lower premiums for those who need it.
Many life insurance agents are company agents and won’t promote the policy that’s actually right for you and your family.
Whole Life is only good for a small percentage of most Americans…and only in very specific situations. We will discuss your particular situation and provide you with the life insurance policy that’s right and affordable for you.
Don’t fall victim to this Whole Life scam. Call us today for a full evaluation of your type of life insurance needs at 888-603-2876. We can answer all your questions!
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