Whole Life Insurance Pitfalls

Whole life insurance gives people a good way to protect their loved ones in the event of the policyholder’s death while also building up a store of cash value savings. Although whole life insurance is meant to be a straightforward product with plenty of guarantees for the policyholder, there are still several key mistakes and pitfalls that people can encounter when buying whole life insurance.

Major whole life insurance pitfalls include:

  • Waiting too long to buy coverage – Although whole life lasts for your “whole life,” it’s still best to buy while you’re young and healthy.
  • Buying too little coverage – Many people don’t buy enough life insurance.
  • Borrowing too much from the cash value – Whole life insurance allows policyholders to give themselves a loan from their policy’s cash value – but too much borrowing can be risky. 
  • Assuming that financial needs won’t change –Whole life insurance offers a safe, guaranteed cash value, fixed premiums and unchanging death benefit – but what if that’s not what you need 10 or 20 years from now?
  • Failing to research the life insurance company –Whole life insurance is a long-term financial agreement between the policyholder and the insurance company; make sure you know who you’re dealing with.

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Waiting too Long to Buy Coverage

Buying whole life insurance has long-term implications. The policyholder is committing to pay  premiums for many years, and the insurance company is agreeing to pay a death benefit at any point in that policyholder’s life.

Because of the long-term nature of the agreement, whole life insurance costs more than term life per dollar of death benefit – and the premiums cost relatively more during the early years of the policy, because the policy’s mortality costs are spread evenly over 50 years (or more) of coverage. For these reasons, it is almost always a bad idea to wait too long to buy whole life insurance coverage.

There is a big difference between applying for whole life insurance at age 30 and age 50. A 50 year old might not qualify for whole life insurance, or might have to pay much higher premiums. It’s best not to delay. Get locked in on a whole life insurance policy when you’re young and healthy. The savings can last a lifetime.

Buying Too Little Coverage

The primary goal of life insurance is to help the policyholder’s loved ones carry on financially in the event of the policyholder’s death. Life insurance is meant to replace income and continue the family’s accustomed standard of living – so that the deceased person’s family aren’t forced into selling the house, moving the kids to new schools and taking on extra jobs to make ends meet.

A single whole life insurance policy might not be enough to provide this level of coverage. Talk with a financial advisor or calculate the amount of money that your family needs to live comfortably for a year. Can you find a whole life insurance policy with a big enough death benefit to provide that – especially if your family lives off the interest alone

Many policyholders might want to consider a mix of whole life and term life policies, to provide the maximum death benefit of term life while also offering the cash value and permanent coverage of whole life.

Borrowing Too Much from the Cash Value

One of the great features of whole life insurance is that it allows the policyholder to borrow from the accrued cash value of the policy. This can be a great source of savings for short-term financial needs. However, a drawback of this feature is that if the policyholder borrows too much money, the life insurance policy might lapse – depriving the policyholder’s family of the death benefit in case the policyholder was to die.

Before borrowing from a whole life insurance policy’s cash value, read the policy carefully to find out how much you are allowed to borrow, and find out what happens if the limits are exceeded. Life insurance cash value can give the policyholder some additional financial flexibility, but it also requires additional attention to detail.

Assuming that Financial Needs Won’t Change

The only constant in life is change. Unfortunately, many whole life insurance policyholders seem to operate under the assumption that their financial needs and life circumstances are always going to stay the same.

One pitfall of whole life insurance is that it does not allow for a lot of flexibility: cash values are guaranteed, death benefit levels are guaranteed, and premium payments are the same amount at the same time each month. This provides a low-risk, consistent experience, but what if the policyholder’s needs change?

For example, consider a young couple starting a family at age 30. They buy a whole life insurance policy to provide financial protection and build guaranteed cash value – their goals are protection and security of their cash; they don’t want to take any big risks with their insurance policy.

But what about this same couple at age 50? Their children have grown. Now the couple is at a different stage of life – thinking about retirement. Their priorities have changed, but their whole life insurance policy is still stuck in the past. People who want to be able to adjust their life insurance to reflect their changing needs should consider buying universal life instead of whole life.

Failing to Research the Insurance Company

Whole life insurance is a long-term commitment, so be sure to research the companies that are offering to sell it to you. Any insurance company selling whole life insurance needs to be around for the long haul – you don’t want to buy a policy from a “fly by night” life insurance company, or from a company that, once you die, turns out to be insolvent. Be wary of cold calls from brokers and insurance agents – do your research first before agreeing to anything. The best life insurance companies have long histories in the business, financial strength to afford to pay claims, and solid reputations.

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