Whole life insurance is one of the most popular, yet least understood financial vehicles. There are definitely times when it makes sense, but you need to know what you’re getting into.
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?
- Benefits of Whole Life
- Types of Whole Life
- How It Works
- Pros + Cons
- Whole Life Quotes
- Who Is It Best For?
- Tips To Buying
- Whole vs. Term
- Alternatives to Whole Life
- Exiting Your Whole Life Policy
What is Whole Life Insurance?
Whole life insurance is a type of cash value life insurance designed to provide death benefit protection for your entire life.
Many individuals and businesses also use it for its tax-favored cash accumulation and access to cash value for you or your loved ones.
Key Features of Whole Life Insurance:
- Guaranteed Level Payments
- Guaranteed Tax-free Death Benefit
- Cash Value Growth with Guaranteed Minimum Interest Rates
- Tax-free Access to Cash Value via Policy Loan
Cash Value Definition: Whole life policies come with a sort of savings account, known as cash value, which earns a guaranteed minimum interest rate.As it grows, it can be used to pay policy premiums or the funds may be borrowed tax-free.
If you really want to dive deep, a whole life insurance definition is not where to start. It’s all about the benefits.
Whole Life Insurance Benefits
Whether you’re interested in life insurance protection for your family or your business, whole life offers a few key benefits that help in either situation.
Some of these benefits are a guaranteed death benefit for life, the ability to build cash value, and the opportunity to earn dividends.
#1 Coverage for Your Entire Life
Unlike term, whole life offers guaranteed protection for your loved ones that lasts a lifetime.
Payments (premiums) are guaranteed to stay level as long as you pay on time, and your death benefit is guaranteed for life as well. Your death benefit may even grow if you buy “paid-up additions.” (See further down)
To lock in the best whole life insurance rates for your entire life, we recommend Health IQ.
#2 Tax-Free Death Benefit
While few things in life are truly tax-free anymore, life insurance proceeds to your heirs are one of them.
According to the IRS, “life insurance proceeds you receive as a beneficiary due to the death of the insured person are not generally includable in gross income, and you don’t have to report them.”
Please note if your estate exceeds certain limits, it may owe estate/death taxes, but the limits are generally very high. Currently (2019), at the federal level, your estate must exceed $11.4 million before it owes estate taxes.
… and you can DOUBLE that for married couples.
#3 Cash Accumulation with Loan Access
A portion of your premium is set aside and invested by the insurance company in an interest-bearing account known as your “cash value.”
Over time, the investment portion accumulates in value through the interest earned. Like the death benefit, the interest that accrues is tax-advantaged, as it grows tax-deferred, 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.
Benefits to Your Family:
- Protection for Life
- Supplemental Retirement Income
- Pay Final Bills and Expenses
Benefits to Your Business:
- Protect Business Income if a Key Person Passes
- Retain Key Performers
- Easy Plan Set-Up
Benefits of Cash Value:
- Grows Tax-Deferred
- Guaranteed Minimum Interest Rate
- Tax-Free Access to Funds via a Loan
Types of Whole Life Insurance
For individuals with a terminal disease, they can buy a policy that is basically guaranteed acceptance. While these are technically whole life policies, they are 100% approval plays and not used for their cash accumulation.
We recommend AIG Direct for guaranteed issue whole life.
Many companies have policies with small death benefits ($1,000 to $20,000) that require no exam and limited questions to qualify.
These are final expense policies and like guaranteed issue, are not really cash accumulation plays. They’re all about quick and easy approval.
Straight Whole Life
This is your most traditional type of whole life policy. It’s your vanilla policy that covers you for life with level premiums for life.
Note: most policies allow you to stop paying premiums at age 100 but you still get the full death benefit at the insured’s death.
Single Premium, 10-Pay, 20-Pay
Whole life policies may have various payment plans. You’ll enjoy the same benefits as straight whole life, but get “paid up” faster. This is a good option if you don’t like the idea of paying premiums for the rest of your life.
For exceptional cash value growth using 10-pay and 20-pay strategies, we recommend a Guardian whole life policy via our partner, Policy Genius.
Whole Life Insurance for Children
A valuable gift you can provide to your child or grandchild is the gift of life insurance.
The way many of these policies work is a parent or grandparent pays the premium, the policy grows (providing coverage as well), and at age 18, the child-turned-adult becomes the new owner of the policy.
At this time, she may use the cash values for whatever she wants (down payment for a house, college expenses, etc.). Or she may continue to pay the premium and keep the policy.
It’s really affordable with monthly rates as low as just $2 to $3 bucks and they’re easy to buy since there’s no medical exam.
How Whole Life Insurance Works
When you buy a whole life insurance policy, you need to have a basic idea of how it works and its components.
The first component is easy…
You’ll enjoy lifelong insurance protection as long as you pay your premiums on-time (and don’t deplete the policy of all its cash value.)
But when it comes to the cash value component, it’s a bit trickier.
Premiums, Dividends, Tax Advantages, and Access
It all starts with your payments (premiums).
When you pay into a whole life policy, the money goes to pay:
- Cost of Insurance
- Administrative Fees
- Policy Fees
What’s left over goes in to fund your cash value, which typically earns a minimum guaranteed interest rate.
While your premium schedule will be fixed either for life or for a set period like 10 or 20 years, there is some flexibility.
If you miss a payment and you have sufficient cash values, the premium will still get paid.
The policy “borrows” the premium out of your cash values.
Note: You’ll be charged interest on this loan, but it’s not as if you miss a premium, your policy cancels and you lose everything. There is some flexibility.
As your cash value grows, you could elect to stop paying premiums out of pocket all together. As long as the policy has sufficient cash to fund the premium payments, you don’t technically have to pay out of pocket.
If your policy pays dividends, they can also be used to pay part or all of your premium cost.
Last – many policies include special “riders,” policy options that allow you to stop paying premiums (waive your premium payments) if you lose your job or become disabled.
Interest and Dividends
Your policy will earn a guaranteed minimum interest rate, typically around 1.5%-4% but it may (almost always) earn more. This will be applied to your cash value (not distributed to you).
It’s important to know the interest is credited to your cash value account. Remember that 100% of your premium does NOT make it into your cash value, however. So if you see your policy was credited with, say, 3% in a given policy year, that was 3% earned on your cash value, not your total outlay.
If your policy pays dividends, you’ll generally have these main options using them:
- Distribute dividends and take the cash (generally income tax-free)
- Leave them on deposit to earn interest
- Apply dividends to pay down your premium
- Purchase paid-up additions – this increases your death benefit without increasing your premium, and builds your cash value
Remember, dividends are not guaranteed. But many long-standing companies have paid them for years without fail. So they’re not technically guaranteed, but most policyholders do expect them.
Overall, you can expect to earn between 2-4% growth of your policy on your total premium outlay.
Some of the tax advantages you would enjoy in a whole life policy are as follows:
No Max Annual Contribution:
The IRS imposes a max contribution limit to qualified plans such as IRA’s and 401K’s. If you exceed the limit, your additional investment may no longer qualify for tax-favored status.
However, you can pay as much as you like into a whole life policy, provided that the policy is set up properly, and enjoy all the benefits below.
As your cash value grows, you won’t receive a 1099 for the interest credited to your account each year, as you do in a taxable account. This helps your cash value to grow without getting hit by taxes in its accumulation phase.
The IRS treats dividends as a return of premium, and are therefore not generally taxable. Some exceptions do exist.
Potential Tax-Free Access to Cash Values
If your policy has sufficient cash values to sustain it, you can access your cash for any reason in the following two ways:
- Withdrawal – Cash value withdrawals can be taken tax-free up to your “cost basis,” or the amount of premium outlaid. If you take more than your basis, withdrawals of gains will be taxed as ordinary income.
- Policy Loan – Loans are not considered income by the IRS, so you could potentially access your cash values (even the growth) tax-free via policy loan
Income Tax-Free Death Benefit
We have also already discussed the tax-free death benefit above. As you can see, there are several tax advantages you can enjoy in a whole life policy.
Monitoring Your Policy
Keep in mind accessing cash values (especially by loan) will affect your policy’s cash value, and may dramatically impact the long-term growth of your policy.
It’s also tricky business. You can’t take too much cash value or your policy could implode. If you have gains in the policy, you could owe taxes on all the gains!
Be sure to run frequent illustrations with the company to be sure your policy will remain in good standing with no risk of lapsing, before withdrawing or borrowing!
Depending on its growth, you may need to modify plans to borrow money down the line or make other adjustments.
If all goes according to plan, however, your policy will earn interest (and possibly dividends), grow in cash value on a tax-deferred basis, and you may be able to access your funds for things like:
- A Business Venture
- Down Payment on a House
- College Tuition for your Children
- Supplemental Retirement Income
We spoke to Patrick Hanzel, CFP and Senior Advanced Planning Associate with Policy Genius (One of our partners), and asked him for an example of how whole life insurance works in a real-life purchase scenario.
“We recently placed a policy for a high income earning 28 year old. They already had sufficient term insurance but were looking for a supplemental permanent policy which would start accumulating cash value. They also wanted to have a policy that was fully paid for in 10 years. Guardian’s 10pay product is extremely competitive and tends to price out second to none. Due to Guardian’s strong history of performance, ratings, and dividends, on top of the favorable annual premiums, the client felt very comfortable moving forward with that policy. We also feel very confident recommending a policy with a company with a proven track record as strong as Guardian’s.”
3 Types of Costs Paid by Your Premiums
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 keep in mind that only that is not a guaranteed interest on your gross payments.
You’ll only earn your guaranty on the premium directed into your cash value (what’s left over after expenses).
Non-guaranteed dividends also play a big part in whole life cash value gains.
“Participating companies” also pay dividends. You can use your dividends (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.
Whole Life Insurance Pros and Cons
While financial advisers argue about the merit of buying whole life insurance, we’ll take a non-biased look at some of its key pros and cons here.
Whole life insurance is especially strong in its predictability and consistency, due to its guarantees. However, critics argue it’s overpriced and offers low returns.
Pros of Whole Life Insurance
We’ve already discussed key benefits such as its fixed death benefit, payment schedule, tax-free access to cash values, and tax-free death benefits.
But here are some other advantages you may have not considered.
- Estate Planning – Whole life is a good policy for estate planning because it covers you for life, and provides a death benefit and cash value which are both income tax-exempt.
- 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.
- *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
A few disadvantages of whole life are its higher cost in comparison to other types of life insurance, its rigid premium requirements, and its meager returns.
- Little Premium Flexibility – Your premium is fixed and you cannot change it for the life of the policy. If you miss a premium, the cost of insurance will be deducted from your policy’s cash value and charged interest until the loan is repaid.
- 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.
We will discuss each of these in more detail below in our section “5 Reasons (Some) Financial Advisors Frown Upon Whole Life.”
Whole Life Insurance Quotes – How Much Does it Cost?
Let’s be honest — because of the superior benefits it offers, the cost of whole life insurance is considerably higher than term, a temporary type of coverage, or even its permanent alternative, universal life insurance, which doesn’t usually grow cash value as well as whole life policies.
That said, we recently collected whole life insurance quotes from five of the top whole life insurance providers in the industry, so we could provide you with an average cost of whole life insurance by age compared to 30 year term insurance.
Sample Whole Life Insurance Quotes vs 30 Year Term
|Age||30 Year Term||Whole Life|
|30 Years Old||$390||$5,376|
|40 Years Old||$618||$8,006|
|50 Years Old||$1,555||$12,726|
*Sample quotes above for a male, non-tobacco user, in “preferred” health and are not to be construed as an offer for insurance. Actual rates based on underwriting approval, and change based on state of residence. Subject to change.
SHOPPERS BEWARE! Premium Options Affect the Cost
Limited Payment Options
When you purchase a whole life insurance policy, your agent will likely ask you if you want to pay level premiums for life (the lowest cost way to go) or, if you don’t want to be paying insurance premiums into your 70’s and 80’s, you could elect to buy a policy that gets paid in full in a shorter period of time.
For example, a “10-pay” will only require premiums for 10 years, and a “20-pay” will only require payment for 20 years, and so on.
Keep in mind choosing a limited pay option will increase your premium, so if you’re comparing quotes with other companies, be sure it’s an apples to apples comparison!
If you have a policy that pays dividends, you could choose for your dividends to be applied to your cost of insurance, thereby reducing your premiums. Remember dividends are not guaranteed, so it’s hard to illustrate how your payments will be affected in future years by dividends.
Flexible Paid-Up Additions (PUA’s)
Most whole life policies have an option to buy “paid-up additions.” This will buy additional coverage (adding to the death benefit) and increases the accumulation value. It can be paid with dividends or out of pocket.
Some companies offer the choice to buy flexible PUA’s. For example, you might have a base premium of $250 per month, but could actually pay $750 per month if you are able to. The additional $500 would go to purchase PUA’s, which would increase your cash value and death benefit.
The best part?
If you can’t afford the full $750 payment, you can always revert back to your base payment, and just not buy any PUA’s.
Again, many agents will give you whole life insurance quotes that include PUA’s because it’s great for cash accumulation, so if you’re comparing two policies with the same death benefit, and one is quoting the inclusion of PUA’s and the other isn’t, the payments will be VERY different.
For exceptional cash value growth using flexible PUA’s, we recommend a Guardian whole life policy via our partner, Policy Genius.
Know before you go.
Pro Tip: To keep costs down, many insurance advisors recommend blending term and whole life insurance for ample coverage in your earlier years, with some additional coverage guaranteed to last for life and cash accumulation. Best of both worlds!
Who Should Buy Whole Life?
The first rule of buying whole life insurance is that you really do need life insurance.
We are not big advocates for buying life insurance purely for investment purposes.
However, if you:
- Have an actual insurance need
- Can easily afford the premium
- Like the idea of growing some additional cash (as part of a comprehensive financial plan)
… then you’re an ideal buyer.
When Is Whole Life The Best Option?
Whole life can also be a Godsend in the following scenarios:
#1 – Business Insurance
Millions 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.
On top of that, it’s great for retaining key employees, and can be structured to protect the business from a potential death while the employee is still working.
#2 – Final Expense Coverage
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, designed to cover funeral and burial expenses.
Buying a final expense policy is NOT typically an investment play. Our list of top final expense companies reviews some of the best policies.
#3 – Individuals with Health Concerns
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.
Our number one choice for whole life insurance with health issues is Health IQ.
#4 – 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.
#5 – Tax-Advantaged Investment Needed
If someone is seeking tax shelter investment opportunities after maxing out contributions to their 401(K) and IRA, (and they need life insurance), whole life obviously can help.
3 Tips for Buying Whole Life
If you are considering buying whole life, the most important rule is to buy from a reputable, long-standing company with good financials.
Whole life insurance cash values are not FDIC insured (although some of the funds may be insured by your state guarantee fund). Still, you want to be sure your company will have the financial wherewithal to pay out any death claims or make good on withdrawals and other benefits.
For example, through our partner, Policy Genius, you have access to companies like Mass Mutual and Guardian.
Both have been in business for 100+ years and hold A++ financial ratings with A.M. Best. (Superior – Top category of 15 ratings) Either of those would be an excellent place to start.
Besides company strength, here are three other important tips to remember when considering whole life insurance.
#1 Use an Independent Agent
Independent agents can “shop the market” for the best policy to suit your needs.
If cash accumulation is your primary goal, you might use a different company than if your primary goal is getting approved for coverage with a high risk medical issue like heart disease.
An experienced, independent agent will know which company is best for your particular needs.
For a quote from our #1 recommended independent agency, please visit Health IQ.
#2 – Don’t Bite Off More Than You Can Chew
Remember this statistic if a whole life agent is trying to push you to buy a policy with a hefty premium.
Did you know that up to 40% of whole life policies are canceled within the first 10 years after purchase?
A study which was performed by the Society of Actuaries, revealed that 20% of whole life policies are canceled with the first 3 years, and as many as 39% are canceled within 10 years of being purchased – because of the extreme cost of maintaining these policies!
If you do buy whole life insurance, be sure your premiums are easily affordable. Remember — life happens!
Perhaps a family member will need your financial support. Maybe you’ll decide to go back to school. Maybe, well, lots of things could happen…
But you don’t want to miss whole life payments (especially in the early years) as it can be very detrimental to the policy.
#3 – Diversify
Just One Piece of the Overall Financial Plan
Whole life insurance is best utilized in an overall diversified financial plan.
You should also be considering qualified plans like a 401k and IRA, taxable accounts, real estate and business assets, and more.
Say you’re nearing retirement and need income. If the market is down, it’s a nice benefit to be able to pull from your whole life cash values instead of your IRA or 401k. On the other side of the coin, say you take a big real estate loss or business loss one year, generating a tax loss for you. That might allow you to consider pulling heavily from your taxable investments (rather than your whole life policy) since you have losses to offset the taxable income.
Don’t let a pushy insurance salesman tell you to put all your eggs in the whole life basket.
Like all financial planning matters, your best bet is to diversify.
What’s the Difference Between Term and Whole Life?
One of the most popular types of life insurance besides whole life is term.
Term life insurance provides life insurance coverage for a smaller, fixed period of time, such as 10, 20, or 30 years.
It costs substantially less than whole life and is typically used for short term needs such as:
- income replacement
- cover a debt such as mortgage or car loan
- cover a key employee
Term doesn’t build cash value or have dividends like whole life either. Here are some of the key differences:
|Features||Term Life Insurance||Whole Life Insurance|
|Coverage Duration||10-30 Years||Life|
|Cost||$20-$40 per month||10-15x more than term|
|Payments||Level thru term||Level for life|
|Cash Value||N/A||Grows with each payment|
|Primary Use||Income Replacement||Estate & Business Planning|
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 30 year 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 paid 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 possible 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.
This is why we recommend you don’t put all your eggs in the whole life basket. A good financial planner will tell you that you should be investing in various buckets.
Be sure to ask your agent about the following policy options. Some may be available for free and some may be available at additional cost:
- Waiver of premium due to disability – allows you to stop making payments if you get disabled.
- Long term care or Living Needs Option – these benefits vary greatly, but the gist is they allow you to access a portion of your death benefit while still living for qualified long term care needs
- Accelerated Death Benefit Due to Terminal Illness – allows you to access some of your death benefit (usually up to half) while you’re still living if diagnosed with a terminal disease.
- Flexible Paid-Up Additions – allows you to establish a base premium that pays all policy expenses and direct additional premium dollars to buy paid-up additions, which increases the death benefit and cash accumulation.
Again, not all these are available with every company, so shop around.
A Low-Cost Alternative to Whole Life
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 time, when someone says they want permanent insurance, we actually recommend universal life insurance to them, with something called a no lapse rider. (AKA – guaranteed universal life insurance)
Guaranteed universal life insurance is another permanent policy type designed to provide lifetime coverage. You’re guaranteed not to have a lapse in coverage as long as you pay your minimum premium as stated in your policy.
What we 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.
5 Reasons (Some) Financial Advisors Frown Upon Whole Life
No fair and impartial review of whole life would be complete without looking at the other side of the coin.
Personal finance celebrity, Dave Ramsey, is a staunch advocate for term life insurance. He calls whole life “the payday lender of the middle class.”
Here are the top 5 most common complaints we hear about whole life.
#1 – Whole Life is Risky with Forced “Contributions”
The argument is this:
Whole life doesn’t allow for “life” to happen. If you purchase a whole life policy and are not able to continue paying the premiums every year, you could lose some or all of your initial “investment.”
Example: Say you start a policy paying $5000 per year. In the third year of the policy you’ve paid $10,000, and your cash value is approximately $6,000. Say you are unable to make further premium payments. The policy will borrow the premium from the cash value.
Result: The policy won’t support two borrowed premiums, and would lapse if you missed a second premium, likely costing you 70-90% of your initial investment. Whole life’s ‘Forced contributions” are less risky if you’ve built up significant cash value or you are very wealth and the premiums are never an issue, but still, subjecting yourself to forced premiums is risky.
- Whole Life Insurance – The Essential Guide – FinancialMentor.com
- Why Whole Life Insurance is a Bad Investment – MomandDadMoney.com
*In most whole life policies you can only borrow up to 90% of the cash value, so actual cash value in example above available for loan would be closer to $900.
#2 – Low Returns
The argument against whole life here is that policy fees and the high cost of life insurance drag down “investment” returns. Most experts estimate lifetime returns of 3-4%. Dave Ramsey says your return will average 2.6% for the life of the policy.
Note: Returns vary from company to company but are typically worst during the first 10 years of the policy. Most policies take 7 to 10 years just to break even.
- The Truth About Life Insurance – Dave Ramsey
- Is Whole Life Insurance a Good Investment? – MoneyUnder30.com
- 8 Reasons to Avoid Whole Life Insurance – White Coat Investor
#3 – Heavy Up Front Fees/Commissions
The fees & commissions argument goes like this:
An agent who sells you a Whole life product stands to make a ton of money.
Most agents make 80% to 110% of the first year’s premium. It’s no wonder that most policies carry steep surrender penalties during the first 10 years and don’t typically break even for 7 to 10 years.
Example: You buy a $5,000 whole life policy with a 90% first year commission. Your agent will make $4,500. You can see why a lot of agents push expensive, whole life policies instead of term.
$5,000 Premium X 90% = $4,500 Commission
On top of that, your policy’s value will have the following expenses subtracted from it:
- Cost of Insurance
- Administrative Fees
- Policy Fees
- And in the first 15 years, typically, surrender charges
Note: It should be noted the expenses are heavily front loaded, making whole life policy performance much better after the first 10 years than the first. That said, all of these expenses drag down your policy’s performance.
- Life Insurance Agents and Commissions: What You Should Know – Nerd Wallet
- Life Policies: The Whole Truth – Wall Street Journal
- Why is My Broker So Eager to Sell Me Whole Life Insurance? – DailyFinance.com
#4 – The Insurance is Expensive
Whole life costs 10-20x what term insurance costs, on average. And even if you need lifetime coverage, you can get a type of guaranteed lifetime coverage called guaranteed universal life, usually for half the cost of whole life.
- Sample Prices:$250,000 Death Benefit
- Whole Life: $4,003 annually
- Guaranteed Universal Life to Age 100 – $1,385 annually
- 30 Year Term – $357 annually
*Male, 40 years old, non-tobacco user in excellent health. Not an offer for insurance. Individuals must apply and qualify for coverage. Rates vary by age & health, and may be different that the stated ratess above. Quotes are estimates only and represent the average cost of each product type available on the market. May not be available in all states.
Opportunity Cost: It’s also important to note the opportunity you’re losing by purchasing whole life. If you bought term or “invested the difference,” many advisors say you’ll come out on top.
- Term vs. Whole Life Insurance
- The Math Behind Whole Life and Term Insurance – SteveStewart.me
- Suze Orman on Life Insurance: Term Life Insurance vs. Whole Life
#5 – Whole Life is Confusing
Some advisors point out the final argument against whole life:
Similar to Warren Buffett’s famous advice, “Never invest in a business you can’t understand,” should you be investing in a policy that few people, even insurance agents themselves (or hedge fund managers) understand?
Example: If I tried to sell you a package where you get cable TV & high speed internet for only $1,000 per month, you would know it’s a rip off. That’s because you know approximately how much both of those cost.
The problem with whole life is consumers are confused by the combination of two benefits: supplemental retirement income & life insurance.
Consumers don’t understand the cost/expected return of either, and that’s how they get confused by whole life pricing.
- I’m Not Sold on Whole Life – And You Shouldn’t Be Either – DailyFinance.com
- The “Investment” That’s Sold, Not Bought – Investment U
So What’s the Truth?
Yes, whole life insurance agents can make a lot of money and may try to sell you more than you can afford because they’re enticed by big commissions. But that doesn’t mean it’s a bad product
That means you need to do a better job of choosing an agent. If you’re talking to an agent who “needs your business,” you’re at greater risk of getting bad advice that helps their pocket more than yours. Our recommendation here is using the advanced planning team at Policy Genius.
Policy Genius has a highly trained team of uber-successful agents that handle all whole life requests. If you want top-notch advice from the likes of CFP’s and CLU’s, who don’t “need” your business, we recommend our friends at Policy Genius.
It’s also correct that whole life insurance returns are not “sexy.” But it’s also a super-safe place to grow your money and has some tax advantages to it as well. It also blossoms into a larger death benefit if the insured dies, so it has that benefit over other “investments” too.
The bottom line is that in the right hands, and if the buyer is careful not to pay more than she can easily afford, whole life insurance is an attractive place to grow some of your money safely and confidently, and offers the security of life insurance coverage to boot.
Options for Exiting Your Whole Life Policy
If you’re contemplating exiting a whole life policy, we strongly recommend you meet with a financial advisor and tax professional to discuss the implications.
If you’ve run the numbers and realized that a whole life insurance policy is not going to work for you, we highly suggest BEFORE getting rid of your whole life policy that you purchase term to satisfy your life insurance needs.
Please be sure that you have the new coverage in place before you cancel your existing life insurance. You don’t want to be caught uninsured.
Here are some options for those of you that decide to opt out of your whole life insurance policy:
Surrender Your Whole Life Policy
The most simple approach is to cancel your policy and take the cash surrender value. In the meantime, if you still need coverage, you might want to consider buying a term or guaranteed universal life insurance policy prior to canceling your whole life policy to make sure you are covered.
NOTE: There may be tax ramifications when you cancel cash value life insurance. Always talk to a tax adviser first to find out how your personal situation will be affected.
Section 1035 of the IRS code permits you to transfer the cash value of an existing life insurance policy to a new policy similar in type…and the best part is there are no tax implications to do so!
We often suggest that clients consider transferring their accumulated funds to a Guaranteed Universal Life policy because the cost connected to this type of life insurance is very low. The focus of a GUL is to provide guaranteed lifetime protection WITHOUT the cash value accumulation and investment component that makes whole life so expensive. In fact, this exchange could actually lower premiums by as much as 50% – 75%.
You may keep the same death benefits, but there is also another option to maintain your premium “as is”, and then ask your insurer for additional coverage as needed.
Hold on to Your Policy
If you want to continue your existing policy, you can increase performance by paying your premiums annually. To achieve this goal you need to ensure that your dividends are set to purchase “paid up additions”, and that your existing policy has a “Paid Up Additions” rider.
This enables you to use as much of your premium as you can afford to buy paid up additions without the policy becoming a MEC and ultimately if you find the payments are too expensive, they may be offset by your dividends.
Before you decide what to do, you should ask for several “in force illustrations” from your current life insurer to nail down what is guaranteed by your policy.
If you haven’t missed a premium payment or taken out a loan against the cash value, ask for an illustration showing how the occurrence of either one of these situations could affect your policy. Be sure to use your imagination when you guesstimate how much you might want to borrow. Even if you aren’t considering this option right now, you should still pick an arbitrary figure and time frame to see what the reality would be if you wanted to exercise this option at some point in the future.
This will give you both the “best and worst case scenarios” regarding your policy you can make an educated decision.*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.