The most popular and well-established permanent life insurance policy on the market is the whole life insurance policy. However, most life insurance professionals recommend term life insurance as the better option. Like most financial decisions, each situation is different.
This article will discuss both the pros and cons of whole life insurance. First, it is important that you have a firm understanding of the difference between term and whole life insurance.
Term vs Whole Life
Quick synopsis – term life insurance is as simple and affordable as it gets. With term life, you’ll receive life insurance coverage for a set time frame (term) at a set rate (premium). In the event that you die during the policy term, your beneficiaries will receive the death benefits. However, once the term expires, the policy is terminated. There is no cash value component within a term life insurance policy.
Conversely, whole life insurance not only includes death benefits, but it also includes an investment component as well. A portion of the premium is applied to actual insurance, while the remaining amount is invested in stocks, bonds, or both. Different than term insurance, whole life insurance does not have a set term, so you can keep the policy for life.
Furthermore, whole life insurance policies carry a cash value which is returned to you if the policy is ever canceled. Whole life insurance policies also include universal and variable life insurance. Next, let’s take a look at the pros and cons of whole life insurance, or rather, the advantages and disadvantages.
Advantages of Whole Life Insurance
As long as you are paying your monthly premium, you will be covered for life by a whole life insurance policy. This idea of endless coverage comfort most clients. In contrast, term life insurance policies do not provide coverage after the age of 65. Once the term policy expires, the premiums typically increase significantly.
Many people appreciate the fact that they will enjoy the same amount of coverage regardless of their age or health, and that the coverage is permanent as long as the premiums are paid. Still, others may find the higher premiums difficult to keep up with. Financial circumstances change once the children are grown and that high-level financial support is no longer a necessity.
As mentioned before, whole life insurance provides both a death benefit and a cash value component. A portion of your life insurance premium is set aside in a savings account usually serving as a retirement fund. This is commonly known as “forced savings”. The insurance premiums you pay are invested in stocks or bonds and then earn interest over the life of the policy. The overall balance of your whole life account can be borrowed against or counts as an asset in your financial profile. While it may take time to grow the real value of your policy, depending on the investment strategy chosen, it can be a worthy investment. In many ways, a whole life insurance policy is similar to a mortgage, with the beginning years of premiums going toward fees and commissions.
Finally, whole life insurance policies have a monthly premium that is locked in for the duration of the policy, with no possibility of change in amount.
Disadvantages of Whole Life Insurance
The single biggest disadvantage to a whole life insurance policy is the cost. The actual cost of life insurance is dependent on numerous factors, such as age, smoking status, policy term length, amount of coverage needed, and your health status.
In reality, the cost of a whole life insurance policy can easily surpass that of a term life insurance policy with the same death benefit by a few thousand a year. Whole life policies can actually cost 5-10 times more than comparable term life insurance policies.
The investment component of a whole life policy might make it worth the excessive premium costs for your situation. Additionally, there may be some tax advantages and it is seen as a forced way to save for retirement. In fact, many agents offering whole life insurance make a selling point to stress that part of the premium is invested into stocks, bonds, and other financial products which then serves collectively to fund your retirement. However, there are two disadvantages to keep in mind regarding this investment feature.
- Whole life insurance policies are not like a 401(k) or IRA where you can decide where to invest your income. You have little authority over the investment choices made on your behalf by the insurance company.
- Surcharge fees are extremely high. Sometimes fees for whole life insurance can exceed 3%. You must understand the fee structure when considering a whole life insurance policy.
Different Kinds of Whole Life Policies
Limited payment insurance, similar to standard whole life insurance, except that premium payments cease once you turn 65, while coverage remains permanent. The monthly premium payments will be higher because they are condensed into a shorter amount of time, however, the total cost of coverage remains the same.
Interest-sensitive whole life insurance has a permanently set death benefit and premium amount, but the cash value component waivers according to current interest rates. Typically, the insurance carrier provides a guaranteed minimum the cash value can be reduced, even if interest rates are reducing the value of your investments.
These whole life insurance policy variations are not available with all insurance carriers.
Is a Whole Life Insurance Policy Right For You?
The consumers that benefit the most from purchasing a whole life insurance policy are those that want to secure a death benefit and that have little interest or experience in investing. Whole life variations, such as universal and variable life will provide the same permanent protection, but with more control over the cash value feature. However, if you are not in need of a permanent policy and costs are more your concern, then term life insurance may be your better option.
It is important to evaluate carefully the amount of coverage being provided for by a whole life insurance policy. Many times, consumers inadequately cover or financial overextend themselves trying to provide coverage. You must be comfortable with your premium payments because a policy cancellation could cost you the loss of your entire investment. Talk with your insurance professional about your specific needs and the pros and cons of whole life insurance before deciding which policy is right for you.