Whole life insurance has gotten a bad rap lately.
Probably because of a few financial gurus that specialize in helping people get out of debt.
Basically, they don’t like them.
The general argument used against whole life insurance is this: premiums are higher than term life insurance for less coverage.
Why would you buy a more expensive product that covers you for less when you can buy a cheaper one that covers you for more?
It doesn’t take an Ivy League economist to figure out buying for less and having more coverage is a better option.
Don’t get me wrong, I’m all for helping people get out of debt. I know the services of these financial gurus are needed today.
The problem with painting everyone with this broad brush is that it doesn’t take each individual situation into account.
If you’ve read a few of the Ask Cris articles, you’ve heard me say time and time again — insurance is right when it fits YOUR needs.
And not everyone’s needs are the same.
In fact, there are situations where whole life policies are actually more affordable in the long run than term life, but I’ll get into that in a moment.
Whole Life Basics
First, let’s look at the basics of whole life insurance.
Whole life is exactly that: it is life insurance you purchase with the intention that you’re going to keep it for your entire life.
You select the coverage amount, and the insurance company gives you a premium.
This premium stays the same for your entire life. It never changes. In its most basic form, whole life works like this: as you pay in premium over the years, you build up cash value in the policy.
The longer you keep it, the more cash value you accumulate.
But at the same time your cash value is increasing, the amount the insurance company will kick in continues to decrease in order to keep your death benefit at the number you originally choose.
It looks kind of like this for a 43-year-old woman in good health:
Yearly Premium: $3786 Cash Value Insurance Co Total Death Benefit
Year 10 $24,765 $225,235 $250,000
Year 20 $63,090 $180,910 $250,000
Year 40 $156,418 $93,582 $250,000
So as you can see, the death benefit remains the same and your cash value continues to increase as the years go by.
The policy goes on until usually until 121 years of age at which point your cash value is equal to the death benefit, and the insurance company will send you a check for the full $250,000 even if you’re still alive.
I for one think they should throw in a bonus kicker for outliving the policy should you make it, but I don’t think that would happen.
The Drawbacks
Let’s talk about the drawbacks first.
It’s more expensive in the beginning.
If you’re only planning on keeping the life insurance in force for 10 to 20 years, then it’s probably not the right fit for you.
Secondly, the cash value in your life policy is subject to inflation risk.
This means if you bought a $500,000 whole life policy when you were 25, and then it paid out to your spouse when you passed away at 85, that $500,000 isn’t worth the same amount after 60 years of inflation.
The Benefits
What about benefits? Well, most people like them because the premium never changes.
It stays the same at 8 years of age or 88 years, provided you started the policy when you were 8 and never stopped paying.
With whole life policies, you also get to build cash value. This means you can cash out if you want or take a reduced paid up option.
As a result, the policy continues at a lower death benefit, but you don’t have to pay any more premiums. Another benefit is the payout is guaranteed as long as you die.
Less than 3% of term policies pay out. This means 97% of the terms expire and never pay a dime.
On the other hand, 100% of whole life policies in force pay out on the death of the insured, as long as there was no foul play or fraud that took place.
No other insurance product has this high of a percentage of payout.
Maybe the biggest benefit to whole life is the significant tax benefits.
It enables people to leave large inheritance gifts and legacy donations to their beneficiaries without the same tax penalties.
I’m not a tax attorney, so for more clarity on this, make sure you speak with an attorney for more on the specifics.
