Whole Life Insurance Pros and Cons

Overview

The biggest advantage of whole life insurance is that it covers the policyholder’s entire life – no matter what happens with the policyholder’s health or financial situation over the years, whole life insurance will cover the beneficiaries in the event of the policyholder’s death. Whole life insurance also offers cash value that grows over time, unlike term life insurance which offers only a death benefit during a limited timeframe – term life only gives a benefit if the policyholder dies, while whole life insurance gives benefits even if the policyholder lives. While whole life insurance is more expensive (per dollar of death benefit) than term life, it offers advantages in its permanent duration and in its cash value investment component.

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Whole Life Insurance Pros

Cash Value

This is one of the single biggest benefits of whole life insurance. Many financial advisers argue that term life is best for most people, because the monthly premiums are lowest and it offers the biggest guaranteed death benefit – but this line of thinking doesn’t take into account the fact that most people don’t die young. (Only 1-2% of term life insurance policies ever pay out – most people outlive their term life policies.)

Term life insurance is like a bet that a person makes against himself – it’s like saying, “I’m going to die in the next few years, so I want my family to get as much money as possible.” But most people who sign up for 20-year term life insurance are still going to be alive after 20 years – and what will they have to show for all those monthly premium payments? Nothing.

This is one of the biggest reasons why people consider whole life insurance – instead of being “a bet you make against yourself,” whole life insurance allows people to hedge their bets. Rather than making a one-way bet that the policyholder is going to die young, whole life insurance recognizes and plans for the very real possibility that the policyholder will actually live to reach life expectancy and beyond.

Whole life insurance delivers benefits to both the beneficiaries (who are left behind when the policyholder dies) and to the policyholder (who has the flexibility of managing the policy’s cash value, taking loans, etc.) while the policyholder is still living.

Lasts for a Lifetime

Just like the name says, “whole life insurance” lasts for the policyholder’s entire lifetime. As long as the premiums are paid and the policy remains in force, policyholders’ beneficiaries will be entitled to the full amount of the insurance policy’s death benefit. This is a big advantage over term life insurance, which expires after a set period of time.

Good for Later in Life

Not everyone buys life insurance when they’re young and in good health. There are a growing number of people in their 40s and 50s who are starting families – either for the first time or as part of a second marriage – and many of these older parents are not able to qualify for term life coverage. Whole life insurance can be a good option for people at later stages of life who find that they need life insurance coverage. After all, life insurance is not just for the young.

Tax Advantages

Policyholders who have term life insurance pay their monthly premiums with after-tax dollars, and as long as they don’t die, that money just disappears. With whole life insurance, policyholders can grow cash value tax-deferred, and can take loans from their accrued cash value tax-free. Whole life insurance also gives policyholders the option to use their accrued cash value to pay their premiums with pre-tax dollars, which can be a significant benefit for policyholders later in life who are at their peak lifetime earning power (and paying the highest tax rates of their lives).

Helpful in Estate Planning

High net worth individuals can use whole life insurance policies to help with their estate planning – for example, by setting up an insurance trust that will pay estate taxes from proceeds of the whole life insurance policy. Whole life insurance is also helpful in planning for final expenses – funeral costs, burial, etc.

Investment options: Whole life insurance offers a variety of tax-deferred investment options, and this can be especially beneficial for policyholders who do not have access to tax-deferred investment options like a 401(k), or who do not qualify to contribute to a tax-deferred retirement savings account. While term life insurance only provides a death benefit (which is unlikely to ever pay off), whole life insurance can be an additional investment vehicle for retirement or other long-term financial goals.

Whole life insurance Cons

More Expensive Premiums

People whose first priority is the highest death benefit for the lowest monthly premium will likely be better served by a term life insurance policy – because it’s true that by this measure, whole life insurance is more expensive than term life.

One reason why term life is so much cheaper is that it typically covers policyholders who are young and healthy – and their risk of dying is relatively low, which makes them less expensive to insure. Whole life insurance premiums have to be higher because they have to cover the risk of death over the course of the policyholder’s entire life – including the later years when death becomes increasingly more likely.

Another reason why whole life insurance premiums are more expensive is that whole life insurance builds cash value – policyholders pay a higher premium each month than they would for term life, but part of that whole life insurance premium is stored for the policyholder in the cash value savings portion of the policy. Term life is a cheap solution to get the maximum level of death benefit – but in all likelihood, most people who buy term life insurance are never going to receive the death benefit. Whole life insurance costs more on a per-dollar-of-death-benefit basis, but it also offers certain advantages that term life cannot.

More Responsibility for the Policyholder

Whole life insurance requires a certain level of savvy – it’s more complicated than term life insurance. People who purchase whole life insurance need to make sure they are aware of the risks and conditions involved with their policy. Just like any investment, whole life insurance requires policyholders to understand the details of what they’re getting into.

Although there are certain risks involved with whole life insurance (make sure to understand the premium payment schedule, terms and conditions for surrender of the policy, details about how to claim the cash value in the event of surrender, etc.), policyholders who are savvy about their financial affairs and who are able to read and understand their policy details should not be discouraged.

It’s just like any other insurance or investment decision – you need to read the fine print. One reason why whole life insurance is more complicated is because it delivers a more complicated (and valuable) benefit – lifelong protection in case of death, and a cash value component that grows over time. These features cost more to plan, calculate and deliver – so it’s no surprise that a whole life insurance policy would cost more than a simple term life plan that only offers temporary coverage and no cash value.

Mismatches With Policyholder’s Stage of Life

Whole life insurance is meant to last a lifetime, but sometimes life changes occur that result in the policyholder’s needs not being met by the existing policy. Some policyholders might want a larger guaranteed death benefit when they have young children, and then want to ramp up the cash value of their policy later in life when preparing for retirement. Policyholders need to make sure that their whole life insurance policy has the right level of flexibility to give them the options they want – at every stage of life.

The Final Verdict on Whole Life

Whole life insurance is meant to be a guaranteed, low-risk product – level premiums, a guaranteed death benefit, and guaranteed cash value. Policyholders who want more options for flexible premium payment schedules, the ability to change the value of their death benefit or cash value, or who want a wider array of investment options should consider other types of permanent life insurance such as universal life insurance or variable life insurance.

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