“Cash value life insurance is one of the worst financial products available.”
Dave Ramsey, Founder of Financial Peace University
Despite the recommendations of popular financial advisers like Suze Orman and Dave Ramsey, Americans continue to buy whole life insurance.
In fact, the American Council of Life Insurers estimates that 63.7% of all policies purchased in the US are whole life.
While whole life has its place in some individuals’ financial plans, we think it can be risky for low and middle income earners. In conclusion, our goal is for you as a consumer to do your research and seek financial council before considering a whole life purchase. Psst! If you are interested in reading about my picks for the best whole life insurance companies, click here to read more!
Learn the Truth & Join the Rebellion
Get Informed – The Case Against Whole Life
Whole life insurance can be risky as an investment, offers a low return, and demands forced “contributions.” In any other investment, if you stop “contributing”, you’re not at risk to lose your initial investment, but that is the case with whole life. See more…
5 Disadvantages of Whole Life
#1 - Risky with Forced "Contributions"
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
- Whole Life Insurance – Myths, Truths, & the Term Alternative
*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
Policy fees and the high cost of life insurance drag down whole life “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!
#3 - Heavy Up Front Fees/Commissions
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.
Whole Life - $4,003 annually
Guaranteed Universal Life to Age 100 - $1,385 annually
30 Year Term - $357 annually
#5 - Whole Life is Confusing
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
In conclusion, we’re not saying whole life is wrong for everyone. There are some rare business and personal uses for it, but it should definitely not most peoples’ go-to retirement savings plan.
Our goal is for you as a consumer to do your research & seek financial council before considering a whole life purchase. If you agree, join the Rebellion.
Already own a whole life policy? Click here
Join the Rebellion! Sign the Insurance Consumer Bill of Rights
The life insurance industry has no such code.
Tony Steuer from InsuranceLiteracy.org has submitted the Insurance Consumer Bill of Rights to Change.org, which among other things, says that agents should only act in consumers’ best interest and provide coverage that is both affordable and appropriate for consumers’ needs.
- The Right to Have the Agent Act in Your Best Interest
- The Right to Receive Customized Coverage Appropriate to Your Needs
- The Right to Pay a Fair Premium
- The Right to Be Informed
- The Right to Full Disclosure and Updates
With adequate support, this petition will be sent to the directors of the Consumer Financial Protection Bureau and the National Association of Insurance Commissioners.
->>Sign the Petition<<-
Share the Rebellion!
If you agree with thousands of insurance and financial advisers who say you shouldn’t be investing in whole life, join the rebellion!
… there’s no application to join. Just share.
3 Easy Ways to Share
#1 – Share on Social Media / #wholeliferebellion Use our social sharing buttons. Share this page with your friends and family today! #2 – Email this Page Do you have a friend or family member who is looking into life insurance or may be soon? Perhaps you know someone who owns a whole life policy. Share this page with them! #3 – Click to Tweet
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Whole Life Insurance Is Not the Right Choice for Most Americans
Financial Bloggers and Life Insurance Agents – Take Note ! In the battle of Term vs. Whole Life…I am about to shock many of you by simply stating that “Whole Life Insurance is not the best life insurance option for most Americans!”
Yes you hear me right, after all the goal of life insurance is to make sure the coverage you receive fits your unique circumstances.
The truth is, the vast majority of prospective clients are much better off buying term life insurance. The key to their success is investing the difference in what they would pay for a whole life policy, in a vehicle with better financial returns, ultimately this is the best option for most people.
Unfortunately, you won’t find many independent life insurance agents who are this frank, the main reason being that huge commissions are paid out on these pricey policies.
Over all, whole life insurance is a great alternative for some high income earners and business people, but unfortunately too many financial advisers recommend these policies to people who aren’t well suited to them. We at Huntley Wealth, sincerely believe the average income earner should buy a term policy and avoid whole life insurance altogether.
What Is Whole Life Insurance?
Whole life insurance is one of the policy options categorized as ‘Permanent Insurance’. In other words, this type of policy is intended to cover you for life. There are 2 components that define whole life insurance:
- Death Benefits – 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 that 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. Like the death benefit, the cash amount is tax exempt during the accumulation phase and even can be withdrawn tax free if the money is taken as a loan.
Advocates of whole life insurance tout the cash value component as a strong reason to buy this type of policy because it typically generates a minimum guaranteed rate of interest and can be borrowed against or used to pay premiums if you find yourself in a tough financial situation.
4 Whole Life Insurance Myths
Many consumers don’t know the ins and outs of whole life insurance, so we would like to dispel some of the most egregious myths today.
Typically, you only need life insurance coverage until retirement. Don’t forget this detail when you are weighing the pros and conts of term vs whole life insurance. In fact, you should be placing extra money into a 401(K), IRA, mutual fund or some other investment vehicle to build a nest egg for retirement if you are not doing so already.
Buy term and investing the difference is a concept involving term life insurance and investment strategies that allows individuals to eventually “self Insure” and provides an alternative to permanent life insurance. Wikipedia
A number of agents argue, that if you’re not good at investing money, you are better off with whole life insurance as that the cash accumulation feature will provide a savings vehicle for you later in life.
Sounds good in theory, but there are many drawbacks to this plan.
1. Myth: Whole Life Insurance is Affordable
One major drawback of whole life insurance is the fact that these policies are far more expensive than their term competition. I ran a quote for one individual where she could choose to spend $700 annually for a term policy, or pay $8,700 annually for a whole life policy with the same amount of death benefits.
If she purchased term insurance and invested the $8,000 she saved wisely, she could earn 8% on average compounded over time and moreover, by retirement she would have enough money saved to be financially self-insured!
Come on, it’s really not that difficult to arrange to have (x) amount of dollars automatically deposited in one or more investment vehicles and furthermore if you’re planning to spend a lot of money on a whole life policy, it’s just as easy to divert those funds to a more lucrative source of investment.
2. Market Volatility Makes Whole Life a Safer Option
Yes, the market might have its ups and downs, but by the same token anyone who is considering whole life insurance, is in the market for a long term investment strategy. Short term dips in the market don’t hurt as much when you are committed to your financial future. In fact, many leading financial gurus, such as Suze Orman, Dave Ramsey and others agree that the average American buying life insurance is best served by purchasing term and investing the difference.
If you are looking to crunch the numbers, we have a fantastic Term vs Whole Life Insurance Calculator that will help you make an educated decision. Click Here.
3. Whole Life Insurance Is a Great Investment
In order to persuade you to buy a whole life policy, agents claim that regardless of what the market is doing, you will always earn a guaranteed moderate rate of return. This is technically true, although they fail to explain that you will earn next to nothing towards the cash value accumulation feature for the first few years despite their rosy predictions for the distant future.
4. The Cash Value Accumulation Feature Justifies the More Expensive Premiums
The majority of the premiums you pay cover commissions, administrative fees and death benefits for approximately the first 10 years. It’s only after these obligations have been satisfied, that you start to reap the advantages of the cash value accumulation feature.
In the event that you happen to experience financial setbacks and allow your policy lapse, without reaching the stage of cash value accumulation, the huge sum of money you spent on expensive premiums will be flushed down the proverbial toilet.
If you survive until the end of your term insurance, one might attempt to use the same argument. This is a moot point as term insurance provides an absolutely necessary financial safety net until you reach the age of retirement.
By the end of your term, you should have built up your own savings portfolio with a view to being financially independent. The house will be paid for, the kids will be out of the nest making their own money and furthermore it’s quite likely that you won’t need a life insurance policy at all by this point.
…and, by the way, you can also get a big chunk of change back if you opt for a Return of Premium Rider.
The Cons of Whole Life Insurance
Huntley Wealth recommends term insurance to nearly all of our clients. The reason we offer this advice is because there are a number of cons that will affect the majority of people look to purchase insurance which we will elaborate on below.
- No Investment Choice: A whole life policy does not allow you to invest in separate accounts like a universal or variable life insurance policy does. It’s great to have the power to split or move your funds between a money market, bonds, or stock market accounts.
- Premiums Are Not Flexible: Your payments are fixed, which means you can’t change them for the life of the policy.
- No Premium Disclosure: You can’t see how the insurance company is applying your premium to administrative fees, death benefits or investment expenses.
- More Expensive: Because of the investment and administration costs, your monthly premium costs a lot more than term insurance, which covers death benefits only.
- Repayment of Cash Value: If you borrow against the cash value, you have to pay the money back with interest.
- Conservative Returns: The interest earned is modest, which means returns may be much less than if you had invested the money yourself.
So When Exactly Is Whole Life Beneficial?
While we don’t recommend whole life insurance to most people there are very specific circumstances where it is perfectly suitable.
NOTE: These circumstances do not apply to the majority of people, with the exception of final expense insurance.
- We support “final expense” life insurance policies, which are small, $5,000 – $20,000 policies to cover burial expenses. These policies are typically whole life.
- If someone is seeking tax shelter investment opportunities after maxing out contributions to their 401(K) and IRA.
- For people who have a large estate and want to ensure their heirs have immediate cash to cover estate taxes.
- For individuals with high risk medical conditions that may only be able to qualify for “guaranteed issue” policies, which are built on a whole life chassis.
- For individuals who are exercising whole life conversions, when no other options are available for them due to their medical circumstances. Since these whole life policies aren’t purchased as an investment vehicle, we endorse them.
- Occasionally, it also makes sense for business owners or wealthy individuals to carry whole life insurance, when return on investment and risk are not a factor, and other benefits like asset protection or hassle-free set up of deferred compensation or supplemental executive retirement plans, are present.
Huntley Wealth Term vs Whole Life Calculator
All of this sounds great in theory, so show me the money! I am pleased to announce that Huntley Wealth now has a Term vs Whole Life Insurance Calculator to help you analyze term and whole life premiums over 10, 20 and 30 years from an investment standpoint. This calculator ultimately illustrates that “buy term and invest the rest” is the better deal 95% of the time.
If you have any questions about term vs whole life insurance pros and cons we are happy to help. We will give you straight talk not some sales pitch when it comes to life insurance. Call us today at 877 – 443 – 9467 and we will outline all your options.
If You Have a Whole Life Policy or Want One - Analyze Your Illustrations
I generally snicker when folks say they’ve been earning a dividend of 5% – 6% for 6 years, when reality their cash value only equals the premiums they’ve already spent. Let’s be very clear about this point, that’s a return of 0%!
If you want to estimate your future return, you must calculate the actual values (which I hope are in the black), not the policy’s stated dividend rate!
To figure this out you need to pinpoint the following details, which can be obtained from your illustrations:
- Current Cash Value
- Annual Premium
- Future Guaranteed Value
- Future Projected (Non-Guaranteed) Value
Without delay, you need to sit down and take a cold, hard look at your personal situation because honesty will go a long way when planning your long term financial goals.
1. What is the State of Your Current Health?
Has your health improved or degraded since you first bought your whole life policy? Would you qualify for a new policy if you were to apply for one today? This is probably one of the most important questions you need to ask yourself.
2. Consider Your Present and Future Financial Situation
Is your income variable or inconsistent? Can you afford your annual premiums, or do you foresee a time when you might not be able to afford to pay them? Ask yourself if you still have an actual need for a life insurance policy? If you didn’t need to pay a premium, are there other vehicles that you could invest your money in instead?
3. Estimate Your Future Return
This will clearly be different for each insurer and will depend on the length of time you’ve owned the policy. In the first 10 years the returns are awful, but they may improve the longer you hold on to your whole life policy.
OK Now You Are Ready to Create an Excel Spreadsheet and Apply the RATE Function
So, let’s say you have a current cash value of $50,000, a guaranteed cash value of $400,000 20 years from now, and you’re paying $10,000 per year.
Note: Your current cash value is minus as it expresses all the money you’ve paid up to this point in time. Your premiums are in the minus column as this is all the cash you have already spent.
Now use the financial function: RATE, and set it up like this:
NPER = Amount of Periods (in this case, years)
PMT = Premium
PV = Present Value/ Current Cash Value
FV = Future Value
Click ok and you would find a RATE of = 3.9%
I suggest you run these calculations both for the guaranteed future value, and the non-guaranteed value. You’re actual future value will likely be somewhere in the middle. If you need any help with the calculations above, here’s a link to a great guide.
Summing Up Your Choices
Now that you’ve figured out the approximate returns, it’s time to decide if a whole life insurance policy is for you. If the numbers illustrate that you would be better off with term insurance, the first thing to consider is what sort of investment vehicle you would like to use to house the cash you’ve saved. You might opt to invest in a 401k with a match, or an HSA...you have many different choices but ultimately it’s up to you to decide what best fits your lifestyle.
If you’ve owned your whole life policy for more than 10 years you might discover it will make 5% – 6% over the next 20 – 30 years, so you might want to hold on to it if you don’t think you can earn more from investing elsewhere and are able afford the premiums.
Options for Exiting Your Whole Life Policy & Joining the Whole Life Insurance Rebellion
So you’ve run the numbers and realized that a whole life insurance policy is not going to do you justice in the long run…now what? I highly suggest getting rid of your whole life policy and purchasing term to satisfy your life insurance needs, but please be sure that you have new coverage in place before you cancel your existing life insurance. You don’t want to be caught uninsured.
Here are some option 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 buy a term or guaranteed universal life insurance policy prior to cancelling 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!
I 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 to 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.
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Our Rebel Leaders
Tony Steuer – The Insurance Literacy Institute
Tony Steuer, CLU, LA, CPFFE is a leader in the insurance industry, fighting for consumer literacy and the Insurance Consumer Bill of Rights. Tony has been featured in BankRate, Forbes, US News, and the Wall Street Journal. His help and support have been instrumental in promoting the Rebellion.
Miranda Marquit – Planting Money Seeds
Miranda is a financial journalist, money expert, and founder of Planting Money Seeds and MirandaMarquit.com. She is widely recognized as one of the best freelance writers in the online personal finance space. Miranda has written for Huffington Post, Wise Bread, H&R Block, and multiple other websites and print publications. She has also written about her thoughts on whole life as an investment here.
Chris Huntley – Huntley Wealth & Insurance Services
Chris Huntley is owner of Huntley Wealth, and is our Rebellion founder and organizer. Chris has been an independent life insurance agent living in San Diego since 2004. Specializing in serving clients 50 to 59 years old and 60 to 69 years old, he is passionate about helping individuals obtain the most affordable coverage that fits their financial plan.