Did you know that whole life insurance is just for rich people? Have you ever heard that? Do you agree?
It could be argued that all types of permanent life insurance (whole life and universal life) are better suited for those of higher income. But…
There's a problem with organizing these sorts of ideas into neat little boxes.
Who decides what “rich” means?
I've lived in a couple of different areas of the country and have colleagues that stretch from coast to coast with plenty living in the “flyover” states in between. And there's one thing I can say with absolute certainty.
What's rich in middle Georgia is not the same as what rich would be in northern California. It's all relative.
And nailing down the suitability of whole life insurance based on income is no less relative. Not that we don't have criticism for the way whole life insurance is often sold.
In fact, there are often times that people are sold whole life insurance at the expense of their financial well-being and that is problematic.
Example: Tom(31) and Sue (28) are a married couple living in North Carolina. They have a combined annual income of $80,000/year. They're considering a life insurance purchase for the first time because they have a baby on the way.
They decide to talk to their friendly neighborhood life insurance agent who goes through a needs analysis with them and determines that based on all the things they'd like to accomplish for their family's financial plan, it would be appropriate for them to have $500,000 of coverage on Tom and $300,000 for Sue.
Their max. budget for the life insurance is $150/month. What should they do? No brainer–both buy level term policies to meet the coverage amount. If they have any money left, they should put it in their savings account–they're going to need it.
A traditional approach might be to sell them the term insurance they need and then take the rest of the money and apply it to a small whole life policy.
Is that the worst thing they could do? No, it's not. But this is why most people develop the opinion that whole life insurance is no good.
Will that very small policy actually perform well? Over the course of 30 years, it will likely have a decent internal rate of return on cash (IRR) but the amount of money going in so small relative to everything else, they likely won't be overjoyed with the outcome.
That's why people develop negative opinions about whole life insurance. Not because it's inherently bad. It's just not great when they compare it to the many thousands of dollars they invested in their 401k. I suspect that if they calculated the true compound annual growth rate, they wouldn't be as excited about their retirement accounts either.
Whole life isn't just for rich people but it is for disciplined people who are committed to putting away a significant portion of their discretionary income/savings to build an asset that has future tax advantages with a low risk to principal.
If that sounds interesting to you, let us hear from you. We'd be glad to help you get started.