Is Whole Life Insurance Policy the Best Option for You?
Whole life insurance is a cash value type of life insurance policy that provides protection during your entire lifetime and offers two key benefits:
- A death benefit to be paid to the beneficiary in the event of your death
- Cash value accumulated over the term of the insurance that can be used as savings or to be borrowed against if you need the money while you are alive
Whole life insurance is also known as "straight life" and "permanent life insurance."
A whole life policy covers you for your entire life, not just for a specific period (such as term life insurance). Whole life insurance policies apply the premiums paid into both the savings or investments and the life insurance death benefit. Whole life insurance is similar to universal life insurance which also lasts your whole life.
Types of Whole Life Insurance
There are 3 main types of whole life insurance:
Traditional Whole Life Insurance
A traditional whole life insurance policy gives you a guaranteed minimum rate of return on your cash value portion.
Interest Sensitive Whole Life Insurance
An interest-sensitive whole life insurance policy gives a variable rate on your cash value portion, similar to an adjustable-rate mortgage. With interest-sensitive whole life insurance, you can have more flexibility with your life insurance policy such as increasing your death benefit without raising your premiums depending on the economy and the rate of return on your cash value portion.
Single-premium Whole Life Insurance
Single-premium is for someone who has a large sum of money and would like to purchase a policy upfront. Like other whole life insurance options, single-premium whole life insurance accrues cash value and has the same tax shelter on returns.
Benefits of Whole Life Insurance
Some of the benefits of a whole life insurance policy include:
- A portion of your premium money goes toward your cash value.
- You may be able to use the savings portion of the policy to eventually pay your policy if you start early.
- Your premium will remain constant during the time you are covered unless you choose otherwise.
- Unless you make a change to your whole life insurance policy, you have lifelong coverage with no future medical exams.
- Whole life provides tax-saving opportunities while you are alive and also tax savings to your estate.
Why Whole Life Insurance Costs More
Whole life insurance is more expensive than other life insurance because it isn't just life insurance. When you pay your premiums for your policy you are putting part of it towards life insurance, but then another part of what you are paying goes into the investment portion.
Naturally, you are going to be paying more for a whole life policy with investment savings, than you would if you just took a basic term life insurance policy. Your whole life insurance policy will also pay you tax-free dividends, this gives you some flexibility and benefit that you would not see with term life insurance. Some people may choose to use that dividend to contribute to the payment of the premium or take cash payouts from it.
Whole Life Insurance Cost vs. Term Life Insurance Cost
Even if there was no investment portion, you have to consider that with whole life insurance, you are purchasing coverage that will last your whole life. Consider this option as opposed to purchasing shorter-term life insurance which covers smaller lengths of time, like 10 or 20 years.
Whole life insurance could cost 5 to 10 times the amount of money that term life insurance costs, but it has cash value and lasts your whole life. You have to weigh the options.
Insurance underwriters determine what they will charge for policies by analyzing risks. The higher the risk, the more expensive the policy. It is the only way insurance companies remain profitable. Therefore, there is a much higher chance that you will definitely die during the term of whole life insurance.
With term life insurance there is less risk since the insurance company will not necessarily pay out a death benefit during the shorter policy period. So when a whole life insurance policy premium is calculated, it is essentially looking at financing the death benefit payout over the term of your life.
An advantage of whole life is that your death benefit and premium in most cases will remain the same. Whole life insurance also builds cash value, which is a return on a portion of your premiums that the insurance company invests. Your cash value is tax-deferred until you withdraw it and you can borrow against it.
Purchasing a Whole Life Insurance Policy as an Investment
Although whole life allows the policyholder to accumulate wealth and use these savings during the course of their life, as far as investments go, whole life insurance is not necessarily the best choice.
Depending on market performance and your personal situation, you may consider purchasing a longer span term life insurance with a fixed annual rate and working with an investment advisor to figure out the best strategy for how you invest your money.
Building and Protecting Wealth With Whole Life Insurance
The rate of return on a whole life insurance policy is very low compared to other investments, even with the tax savings factored in. Life insurance should not be used solely as an investment tool and you should judge your policy choices on the protection and not only the rate of return. The examples below form a good starting point to understanding when whole life may work well for your situation.
Prices Variations With Different Life Insurance Companies
- If you are dealing with an agent who can only offer you options from one life insurance company you should shop around to find alternative quotes.
- A broker may be able to give you several quotes for whole life insurance, with various options.
- A financial advisor can review various aspects of your financial plan.
- You can get quotes with several agents to get an idea of price. There are many whole life insurance policies to choose from.
Beware of Hidden Costs
Do not ever just buy whole life insurance because someone says its the best choice. Whole life insurance pays higher commissions to the broker, and may also include fees for the management of the investments. This is totally normal for investments, you will usually pay fees somewhere, but make sure you discuss these aspects with an advisor and have been well informed on your choices and what to expect.
Asking your financial advisor or life insurance broker or agent questions will yield the best results for your long term. If you don't like how they handle your answers, find someone you are comfortable with. This is your life you're investing in and your family's security.
Address concerns about fluctuating stock market prices, for example, ask your advisor what they think of what happened with universal life policies in the past 20 years. Make sure you are comfortable with the answers you get. Find out how your whole life policy will protect you and how the savings portion works.
Being well informed will always protect you fully and a good advisor will not be annoyed with your life insurance questions but will be happy to thoroughly review your concerns and give you guidance.
Additional consideration; if you really want to invest a couple of hundred dollars a month into "savings", you should speak to a financial advisor who can review a strategy that will benefit you best. Then once you have looked at all the options, make an informed decision. Whole life may be the best decision for you, but you need to explore all your options to know.
Examples of When a Whole Life Policy Could be a Good Choice
Whole life is an interesting option when you make it part of your financial strategy. An important part of a financial strategy though is understanding the financial implications and making a solid plan that makes sense. Getting solid financial advice is a big part of it.
Here are 5 examples of when a whole life policy can help as part of your financial strategy and as a way for you to build or protect wealth:
Whole life insurance or permanent life is a good option if you are young and do not yet have the means to save your money on your own and look at this as a forced savings mechanism. You do not necessarily have to take the majority portion of your life insurance in a whole life policy.
Home, Sweet Home
You may take a percentage of your total needs, or just what you can currently afford, and use it as part of a multi-tiered lifelong strategy to ensure you always have a little life insurance and some savings, as you build your lifestyle. You could use the savings portion to secure loans or even a mortgage in the future if you one day want to buy a home or start a family. You can supplement a whole life policy with term life when you need more life insurance, and obtain that portion at the lower cost.
Your Health Status
Although you may be very healthy and young, the future could be very different. Having issues with an illness or even having trouble getting life insurance could still be the concern. Whole life is an excellent way to secure a policy that will last your entire life. Remember, you can always purchase less whole life, and supplement it with more term life at a lower cost.
Access to Disposable Income
If you are wealthy and have more money than you will need, then whole life insurance may be a very advantageous way to shelter/invest the money due to the tax-free implications of the interest and dividends that build off the savings. In this situation, the whole life coverage can be advantageous for estate planning as well.
Legacy Death Benefit
If you want to leave a large legacy death benefit to your family or someone else when you die, regardless of your age, then whole life is a good way to finance this. For example, if you want to leave $500,000 to your child when you die because they have special needs and will need this money no matter what their age, then whole life can help you finance that by means of securing the death benefit, even if you die when you are very old. In a case like this, you should really consider your policy as a way to finance the legacy death benefit because that's what you are doing.
The Bottom Line on Whole Life Insurance
Keep these points in mind when you are deciding if whole life insurance is the best option for your needs:
- Whole life insurance will provide a death benefit, tax benefits, and cash value, but will cost you a lot more than the cheaper more straightforward term life insurance option.
- Whole life insurance is a safer permanent life insurance choice than some others, it can provide guaranteed interest, premium, and death benefit, so you know what to expect.
- Whole Life is the most expensive option in the life insurance family of policies and may cost 5 to 10 times more than a term life policy and a little more than a universal life policy.
- Get whole life while you are young as part of a strategy to maximize benefits, or when you are older if you are wealthy and want to do something with all your extra money.
- Make sure you will be able to pay your life insurance policy. Buying a whole life policy will not help you if you end up skipping payments or choosing an amount you can't afford and have to try and switch life insurance policy later, or worse get canceled and end up losing everything. Start reasonably, you can always add coverage as you need it. The important thing is to start somewhere.
- Make sure that the insurance company you are purchasing your life insurance policy from has strong financial ratings, you are investing in a policy that will last a lifetime, so the insurance company you choose should have good stability.
The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.