Is Whole Life Insurance Right for You?

by AJ Pettersen · 16 comments

Happy couple

When it comes to purchasing life insurance, you have several choices. My wife and I have been looking for a way to allocate our finances and create a life insurance plan. We have discussed a number of different options, and whole life insurance has been part of the conversation. This type of insurance carries a death benefit and accumulates cash value as money is added. We have been weighing the pros and cons, which I will discuss below.

Is whole life insurance right for you?

Pros of whole life insurance

Whole life insurance has a number of advantages if used in the right way. Depending on how much money you commit each month to the plan, it carries a certain amount of death benefit payout and cash value.

Whole life insurance is permanent and thus pays out no matter when the policy ends. Death is inevitable, and whole life insurance will pay out as long as the premiums are paid every year.

The savings portion of the plan accumulates cash value, with compounding interest, as an investment. This life insurance is an offensive, as well as defensive, tool in financial planning.

The death benefit and the cash value can both be taken out tax-free. This acts in the same way that a Roth IRA does. This also acts as a benefit in estate planning. If other portions of an estate are subject to tax, the death benefit of a whole life plan can be helpful in paying these taxes.

If you need to withdraw cash, you can essentially take out a loan from yourself. When a loan is taken out, as long as payments are continued, the plan acts as though the loaned amount is still there. In this way, you can act as your own bank. Rather than making interest payments to an institution, you can make them to yourself.

Cons of whole life insurance

While these plans do carry many advantages, there are also some downfalls. You need to make sure you look into all the details of any plan you’re considering.

Whole life insurance is expensive. Because you pay for the premiums of the insurance, as well as added cash value, these plans can cost quite a bit — especially when compared to their “term” counterparts.

The plans can be very complicated and some agents may show returns before charges and fees are subtracted. This would make the plan look much better than it actually is.

The returns on whole life investments usually linger around 5%. Though it’s a fairly safe investment, retirement accounts like a 401k or IRA typically have better returns.

Is whole life insurance right for you?

My wife and I are planning on adding whole life insurance to our financial plan. We will continue to use other forms of investing as well, such as a 401K and IRA. By using a number of different investment strategies, we hope to create a well-rounded plan. Whole life insurance is a great way to protect yourself and your family members both now and in the future.

Bottom line: Whole life insurance can be an excellent avenue if you’re able to put a consistent amount of money into the plan each month. If you’re unsure whether you’ll be able to keep up with payments, it’s most likely not right for you.

What type of life insurance do you have? 

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{ 16 comments… read them below or add one }

Bill December 26, 2012 at 7:36 am

As far as I am concerned, the biggest problem with whole life insurance is agents. I doubt that you get a clear picture of the costs and benefits from an agent trying to sell you a policy. Whole life may be a good alternative, if you are young and need coverage. If you have life insurance through your employer, you may not want to buy whole life, but look at other investment alternatives. Portability is one concern. Employer plans are not usually portable. When you leave, you lose that benefit. I’m old enough and have only my wife as a dependent, so I have little need for life insurance. Other people will have different needs.

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Josh @ BecomingYourOwnBank.com April 23, 2013 at 11:03 am

If you make 5% on your money after the cost of insurance. Please. You tell me the easy way to explain the cost.

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KM December 26, 2012 at 11:56 am

I have a bunch of different plans because I don’t want all my eggs in one basket. So I have a 401k from work, a Roth IRA on my own, two mutual fund investments (aggressive growth), a municipal bond investment (safe growth), high term life insurance, lower whole life insurance, and another whole life insurance for my son. I got the life insurances when my son was born so that he would always be covered in case something happened to me. The term will provide most of the financial protection for him, while the whole life policy will add a bit more in case something happens but also acts as an investment if nothing does. I also got a whole life policy for him so that he would accumulate a nice chunk of money for his retirement or as an emergency fund. The nice thing about it is that it can be taken out without tax penalties and it’s always technically under his name instead of mine.

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Cyrus December 26, 2012 at 1:38 pm

Whole life insurance is a horrible product, hands down, and is never a good idea for anyone! Here’s why:
1. It is about 20 times more expensive than term on average. Only about 5% of the whole life premiums are actually going towards the insurance. You can much buy more coverage in term and use the savings to invest the money yourself or do other smart things with money like pay off debt or build up a liquid emergency fund. Insurance should never be used as an investment – insurance is used to transfer risk.
2. Whole life doesn’t offer great rates of return to begin with, and the fees hidden in the product plus the high commissions paid to the agents eat up even more of the “return.”
3. The tax savings argument is a myth. The death benefit is tax-free on any type of life insurance, and the only reason the savings inside whole life probably won’t be taxed if you cash out is because your tax basis is the total of all your premiums payments, which is almost never lower than the cash value due the high premium cost and low rate of return.
4. The cash value that builds up isn’t really yours. The only way to get money out before you die is to either cancel the policy or borrow the money with interest. To make matters worse, when you die, the insurance company pays only the death benefit, and they keep all the built up savings!
Bottom line is that you are better off putting the money in a cookie jar than in a whole life product. Buy 15-20 year term insurance at about 10 times your income, and use the savings you would’ve paid into whole life to build enough wealth so that when the term ends, you will be self-insured and won’t need insurance anymore. If you have several hundred thousand dollars in a retirement account and no debt, I think your spouse will be OK if you die.

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WT December 29, 2012 at 6:20 pm

There is a very small percentage of the population with the self discipline to actually invest the savings rendering that plan useless. Out of the ones who actually do invest the savings, a large percentage will not have the knowledge to properly invest and lose more than they save…or they would pay an advisor huge fees to invest for them, still not maximizing their potential return. Your plan works…but only for a small percentage of the population. It is ridiculous to think that there is a “one size fits all” plan…every person has specific circumstances, desires, and abilities that should be factored in while creating a custom package custom tailored for them.

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Cyrus December 30, 2012 at 12:05 pm

Sorry WT, but I don’t buy that argument. Two reasons:

1. Most life insurance premiums are auto-drafted out of a customer’s checking account every month or quarter or whatever. Money can be drafted automatically into a mutual fund or a money-market account just as easily. Provided a customer gets the correct advice and has the money either way, they can easily save their money in a real investment, not a product that keeps their money when they die. The problem is that most people don’t get good advice, and whole-life salesmen certainly aren’t going to offer better ways to save. 
2. I agree that most people don’t have the discipline or maturity to avoid or limit lots of bad or harmful products in our society. However, that doesn’t mean that we shouldn’t try to educate people about better options and help steer them away from these products. The same goes for pay-day loans, lotto tickets, gambling, junk food, alcohol, drugs, etc. Most personal finance experts, including famous ones like Dave Ramsey and Suze Orman, will tell you that any type of cash-value insurance is a bad product, no exceptions.

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Kyle January 3, 2013 at 8:05 am

A few things…

1. There are always different products and crediting options available in the market.

2. A whole life contract is taken out (typically) for a very specific reason. As Bill stated above, the problem with whole life is agents. Most do not understand how to properly structure the contract to accomplish the clients goals. If you use it like KM stated above, it will preform as intended. It should never be the only retirement vehicle a client has.

3. There is always a need for insurance protection. I have delivered several claims over my career in this business. Never once did the beneficiary not wish they had purchased more (even the extremely affluent).

4. I agree with you on tax savings… you need to be very careful when taking loans from the policy otherwise you could potentially trigger a huge tax bill. Living off of the tax free loans is like trying to retire on your home equity line of credit (it will work, just not for long). There is however a way to utilize a retirement strategy with life insurance with zero risk and guarantees.

5. The cash value should be yours! The problem is most agents will design the plan to have a level death benefit (meaning the cash stays with the insurance company when you die) vs an increasing death benefit (the cash and the death benefit pass to the beneficiary minus any loans or withdrawals).

6. Was the closing statement a Dave Ramsey quote ;-)

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Josh @ BecomingYourOwnBank.com April 23, 2013 at 11:06 am

Recent studies show whole life getting 6.26% tax-free. It’s amazing how one man named Dave Ramsey can say something so uneducated and so wrong and then everyone just believes him with zero education. Why don’t people think for themselves?

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Bert December 27, 2012 at 11:10 am

Cyrus is absolutely correct, on all points. I had an uncle once who sold insurance for a living for decades. When he died, he had no whole life on himself. Get the picture? For a sustained and effective investment, nothing beats a side business. Handled properly, and earning a profit, will provide more tax advantages than any other method out there.

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WT December 29, 2012 at 6:30 pm

What happens when that person is forced into a nursing home? All those profits are only good for paying the nursing home bill…I am an agent as well and do not have a whole life policy…but not because they are bad investments, only because they are not the right investment for my situation. More times than not, I can find a better solution for my clients, but there are occasions when a whole life policy is exactly what the clients is looking for to obtain their objective.

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Cyrus December 30, 2012 at 12:16 pm

That’s what long-term care insurance is for, once you reach about 60 years old. It’s not cheap, but still less expensive than cash-value life insurance in most cases. There are several other articles on MoneyNing discussing the topic of long-term care insurance.

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Kyle January 3, 2013 at 8:06 am

Great comment WT.

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Kate December 30, 2012 at 12:30 pm

My mother and father had very low incomes all their lives, and they were Depression babies who had absolutely no faith in banks or in the stock market. They purchased whole life insurance when they were young and healthy, in an amount they could pay off while they were still young and healthy, and when it was paid up, they put it away in the safe deposit box and forgot about it. Daddy’s insurance paid for his funeral and his cemetery plot at the VA Cemetery, when combined with the death benefit he got from the VA. Mama’s insurance remains a comforting cash reserve that she can’t spend impulsively (she has no head for investments, finance, etc. at all, being a Southern lady who left all that to her husband) and will cover her final expenses likewise, pllus costs of any end-of-life nursing care she may need. Whole Life insurance is a very good deal for poor people who don’t trust banks or have any money to spare for “investments”. Oh, and I lost my entire retirement nest egg that was “invested” for me, in four successive stock market crashes. Thanks a lot, brainiacs.

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grinch December 30, 2012 at 1:55 pm

I do not endorse whole life insurance, but did buy whole life policies for my children when they were babies. They were called 10 Pay Life. We got a policy for $15,000 each, which is enough to bury them if they die. We made one payment each year for 10 years. The policies are now paid off and the kids will always be insured. I do not remember how long it took for the policy payout to equal what we paid. The agent’ s earnings estimate is garbage.

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QualityTermLife January 1, 2013 at 1:14 pm

Universal Life is too expensive for the value. I can’t think of any reason to ever recommend it. Perhaps for people who are well-off, Whole Life can be a convenient option to insure a business partner or loan, bequeath a charity, pay estate taxes, or leave a legacy to heirs.

But that is not most people. You can get 8 times more coverage for the same monthly payment with term life! The typical profile of a term life insurance owner is someone who is a family breadwinner and has minimal savings. It is critical protection. If you are in this category and aren’t insured, get insured now!

Advantages of Term Life Insurance are: totally affordable, and ideal for younger families when the need for protection is greatest.

Choose Term Life Insurance for covering specific needs that will disappear with time, such as: Income replacement, Financial security for dependents, Mortgage protection, College funding, Final/burial expenses

Use a free online quote engine to compare term rates from hundreds of top-rated companies to see how affordable it is. (I’d recommend Quality Term Life because they don’t ask for you phone or email to get quotes.)

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Josh @ BecomingYourOwnBank.com April 23, 2013 at 11:09 am

It’s hard to say anything really after so many comments by clueless people. What do you do when everything being spread is just wrong? I can’t even argue with the people who leave comments on these boards, they literally have no research and get all of their advice from entertainers on the radio, and then the regurgitate the terrible advice and act like they know something.

Clueless won’t get you anywhere. Take a minute to do some research before you comment please.

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