There are a variety of different life insurance policies available for people who want to provide financial security for their family.
Whole Life Insurance is one of your options, but is it a good fit for you?
Let’s take a look at this type of policy and explain how it works, its pros and cons, sample whole life insurance quotes, and who should buy it so you can make an informed decision.
What is Whole Life Insurance?
Whole life insurance is one of the policy choices in what is called ‘permanent Insurance.’
This type of policy is intended to cover you for life.
It is a complete package of insurance coverage that covers the policyholder for long-term financial obligations.
When you are considering this policy, there are 3 components that make up this type of life insurance coverage.
These 3 components include:
- Death Benefit – This is a fixed level benefit that exists for the life of the policy and is paid to your named beneficiary. The death benefit is tax deferred, which means it cannot be taxed when it is paid out.
- Cash Accumulation – A portion of your premium is set aside and invested by the insurance company in an interest bearing account. Over time, the investment portion accumulates in value through the interest earned. Like the death benefit, the cash amount accumulated is tax exempt both during the accumulation phase and even can be withdrawn tax free if taken as a loan. The cash value generally has a minimum guaranteed rate of interest and can be borrowed against or used to pay premiums if you find yourself in a stringent financial situation.
- Fixed Premiums – Some types of insurance exist, like universal life insurance, which allows flexible premium payments. Your policy stays active as long as enough cash is in the cash value to support the cost of insurance. You don’t typically have that option in Whole life, however. Premiums must be paid on-time, *every time. If you can’t make the payment, your premium will be “borrowed” from the existing cash value. This accrues interest, however, and may need to be paid back to keep your policy in good standing.
Who Should Get Whole Life Insurance?
Whole Life insurance is ideal for comprehensive estate planning, death taxes, and to cover your family for your entire life span.
Some insurance agents and financial advisers say it’s an ideal plan to supplement your retirement needs as the accumulated cash value will be available in loan format.
This results in potential tax-free income that can be used for retirement, to purchase a building or business, to put your kids through college, or other needs.
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.
I even created a term vs whole life insurance calculator to illustrate the financial benefits of buying term and investing the rest!
In my viewpoint, I think whole life is oversold (mostly by greedy agents trying to make a big commission).
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.
But, whole life has its place in the following scenarios:
- Business Insurance – A lot of big businesses fund executive compensation plans with whole life. It cuts through a lot of red tape and administrative issues that other plans carry.
- Final Expenses – Many policies offered over age 70 or 75 are only available as whole life policies. These are typically small amounts of coverage, like $5,000 to $20,000. Our list of top final expense companies reviews some of them.
- Health Issues – In some instances, people can only qualify for a “guaranteed issue” policy due to health issues. These are often types of cash value whole life policies and could be a good choice if options, like universal life or term, are not available.
- Advanced Estate Planning – There are situations when an estate may require life insurance for liquidity or estate tax purposes, and depending on the setup, it may be advantageous if the policy is a cash value plan.
- Accredited Investors – Most advisers these days agree that whole life offers low returns (it often doesn’t break even for 7 to 10 years). A lot of people buy too much and can’t afford the premium, miss crucial payments in the first 10 years (as the cash value base is building), or simply don’t see the return they had hoped for and cancel the policy early. All of these people end up wasting their money. However, for the right type of investor, one who will pay on time, every time, and stick to the policy long-term, there can be attractive benefits on the back end, such as tax free access to cash values. In some cases, this can outweigh the lackluster performance of whole life during its accumulation phase. That being said, I would only ever sell a whole life policy as “an investment” to an investor worth $1 million or more, or who makes $200,000 per year with investing experience. These are the best people to reap the benefits of whole life policies.
If you need life insurance for a shorter duration, term life insurance may be more suitable (and less expensive). Universal life can also be used for a shorter term insurance need with the potential to cover you for life.
How Does Whole Life Insurance Work?
When you decide on the amount of coverage, your premium is used by the insurance company and divided between the following costs:
- Administrative Costs – For administering the policy.
- Mortality Cost – Applied toward the death benefit coverage.
- Investment or Savings Portion – Applied toward the savings/investment feature after the above costs have been applied.
Most policies offer a guaranteed minimum interest rate that your savings portion (cash value) earns, such as 1.5%, but again, only the premium directed into cash value (what’s left over after expenses) is guaranteed to earn this interest.
Non-guaranteed dividends also play a big part in whole life cash value gains.
You can use your dividends (again, not guaranteed, but the companies pay them out just about every year like clockwork) to pay down your premium, or you can take them to buy what are called “paid up additions,” which increase your cash value and death benefit.
Or, you can take them as cash like a stock dividend and use them to supplement your income.
You can also borrow from your cash value, which most people do, as this is typically a form of tax free income (since it’s a loan). This is easy to screw up, so be sure to speak to a tax advisor.
How Much Does Whole Life Insurance Cost?
We created a free calculator that analyzes term and whole life premiums to show the difference over 10, 20, and 30 years from an investment standpoint.
It will ultimately illustrate that “buy term and invest the rest” is the better deal 95% of the time.
It’s important to understand, though, that whole life insurance has other benefits besides just the insurance component, so be careful comparing it to term life insurance.
Of course, it will be a lot more “expensive,” since it offers lifetime coverage and also builds cash as we discussed earlier.
The Problem with Whole Life Insurance
The problem with Whole Life Insurance is that in your first year alone, most of the premiums you pay go toward 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.
In the first year alone, the agent may receive anywhere from 55% to as high as 100% in commission from the premiums you pay.
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.
Comparison of Term vs Whole Life Insurance
Let’s do a quick review of these 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 to 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 if you survive to the end of the term), among 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.
Cost Comparison of Term Versus Whole Life
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 out 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 out 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), IRA, or mutual funds, 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 the other out, creating a net loss as opposed to a net gain.
Whole Life Insurance vs. Universal Life (The Low Cost Lifetime Alternative)
When most people search for whole life insurance quotes, they use those words because they think this is the only type of policy offering coverage for their “whole life.”
Ninety-nine percent of the permanent insurance I sell is universal life insurance with something called a no lapse rider.
In other words, you’re guaranteed not to have a lapse in coverage as long as you pay your minimum premium as stated in your policy.
What I like about universal life insurance guaranteed to age 100 or 120 is that it’s easy to understand. It’s very similar to a term life insurance policy, but is available for the rest of your life.
It does have a cash value account attached to it, but if you’re just paying the minimum and aren’t looking to accumulate cash in an insurance policy, you don’t really need to understand that component. Just think of it like term to age 100.
So, if you’re looking for affordable lifetime coverage, consider getting a universal life insurance quote.
Pros of Whole Life Insurance
- Estate Planning – This is a good policy for estate planning because it covers you for life, and provides a death benefit and cash value which are both tax exempt.
- Guaranteed – The premium you pay, the death benefit, and the cash value is guaranteed. Although it might seem more expensive at the outset, you also have to remember that inflation rises over time, which in effect decreases the cost of your premiums over the life of the policy.
- Convenience – This is an excellent type of policy if you are primarily concerned about providing both a fixed death benefit and an investment feature, but have little understanding about investments.
- Premium Costs – When you buy this type of policy, your premiums are fixed for the life of the policy. Initially, they will be more expensive than what you would pay for a term life policy, but reach greater parity as you age.
- Available Cash – You can borrow against the cash value as an added convenience, or access the entire accumulated cash value should you cancel your policy at any time.
- *Possibly Exempt from Creditors – The cash value and death benefit may be exempt from creditors in the event you are sued, as the money is intended for your beneficiary.
* This is not legal advice. Please seek legal counsel for your state regarding the protection from creditors life insurance may or may not provide.
Cons of Whole Life Insurance
- No Investment Choice – A whole life policy does not allow you to invest in separate accounts, like a universal or variable life insurance policy, so you cannot move your money between the money market, bonds, or stock market account. You cannot split your money into different accounts or move your money to different accounts.
- No Premium Flexibility – Your premium is fixed and you cannot change it for the life of the policy.
- No Premium Disclosure – You cannot see how the insurance is splitting your premium between administrative, death benefits, or investment expenses.
- More Expensive – Because of the investment and administration costs, your monthly premium is much more expensive than term insurance, which covers death benefits only.
- Repayment of Cash Value – If you borrow against the cash value, you have to pay it back and are also charged interest, as it is treated much like a loan.
- Conservative – The interest you earn is conservative and the investment returns may be much less had you invested the money yourself.
Is Whole Life Insurance Worth It?
It really depends on your USE for the policy.
If you need the cash value component and plan to use the tax free loans, whole life can act as a nice supplement to your retirement income.
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.
However, if all you need is lifetime coverage, you can probably find a lower cost option, as we’ll discuss below.
We recently published an article that deals with this question in more detail here.
I’m not saying that the average American shouldn’t buy whole life, but don’t just accept the sales pitch the life insurance agent gives you before you sign up for a policy.
The person you want to speak to is an experienced financial adviser. They can outline the pros and cons of both, and let you know what other financially advantageous, financial investment vehicles may be available to you.
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, call me at 888-603-2876 today and I’ll be happy to answer all your questions.*While we make every effort to keep our site updated, please be aware that "timely" information on this page, such as quote estimates, or pertinent details about companies, may only be accurate as of its last edit day. Huntley Wealth & Insurance Services and its representatives do not give legal or tax advice. Please consult your own legal or tax adviser.