Whole life insurance is both good and bad depending on the need of the individual and how well whole life matches that specific need. For some people, whole life insurance is an incredible tool used to accomplish one or several goals. For others, it's a complete mismatch and will provide little more than disappointment. By the end of this article, you'll understand if whole life insurance makes sense for you or if you should avoid it.
Advantages of Whole Life Insurance
Whole life insurance is incredible customizable. There are few, if any, financial tools professionals have in their arsenal that provide the versatility of whole life insurance. The customization that whole life insurance affords, is an often overlooked and (sadly) misunderstood aspect of the product. But when understood and used correctly, it can help people achieve financial security in ways they likely never imagined.
Whole life insurance can provide lifetime death benefit. While many people assume they will accumulate wealth that no longer requires they own life insurance, very few people ever truly accomplish this financial goal. Independent research shows that retirement-aged Americans make up nearly one-third of all permanent life insurance sales in the U.S. This same data shows us this age group pays almost two-thirds of all the premiums. This suggests a lot of people find out they don't have the assets to fully drop life insurance coverage once they reached more advanced ages. Buying a whole life policy at a younger age would likely save these people thousands of dollars.
Most whole life policies earn dividends. These dividends represent the insurance company's willingness to share its profits with policy owners. This adds significant value to the policy owner through enhanced cash value and death benefit.
Whole life insurance can achieve guaranteed paid-up status. This ensures that the death benefit remains in force with no future premium payments required. This offers the policy owner significant peace of mind. Imagine knowing your life insurance exists forever and you don't have to pay any future premiums to keep it.
Disadvantages of Whole Life Insurance
While whole life insurance offers many great features, it's not the perfect solution to every problem. It does have drawbacks and they may keep some people away.
First it's relatively expensive death benefit. If you are young and/or without lots of income or financial resources but in serious need of death benefit, whole life insurance is probably a bad choice for you. You need to find a way to buy a life insurance policy without spending lots of money and that is what term life insurance was designed to do–just not forever.
Whole life insurance benefits often take a little time to materialize and not everyone has the patience to wait for these benefits. The cash value, dividends, and paid-up status often require a several year commitment before the policy owner can take advantage of them. For some people, this is simply too long.
The customization of whole life insurance that makes it great also requires that you buy it from a qualified professional who understands all the flexibility whole life insurance affords someone. Far too many people buy whole life insurance that doesn't meet their needs solely because the agent who sold it didn't understand what options existed when it came to customizing the whole life policy. This is in our experience by far the most common reason people tend to dislike their whole life purchase.
Why would anyone Buy Whole Life Insurance?
There are three main reasons people buy whole life insurance:
- They want/need the permanent death benefit
- They want to use it for its cash accumulation features
- They want a living death benefit feature it provides
Permanent Death Benefit Needs
For some people a permanent death benefit is a non-negotiable requirement. These are people with more unique needs. A few examples include:
Those who have lifetime plans to care for someone. This could be a child with special needs. It could be a spouse who experienced a significant illness or injury and depends on the other spouse for daily needs. It could also be a friend or family member that one has decided to take in and care for permanently. In these situations, the caregiver likely worries about the individual's well being in the event the caregiver dies. Because it's very difficult to estimate the length of the caregiving obligation, permanent life insurance is a more suitable death benefit option.
Another permanent life insurance need comes from those with assets sufficient enough to owe various transfer taxes such as state or federal estate taxes. While some of these people may have liquid assets sufficient to cover the taxes and therefore require no life insurance, the majority of people with assets this large tend not to have such liquidity. Life insurance plays a crucial part of the financial plan to provide the needed liquidity to cover the taxes, which are usually due in a relatively short time period after death. In this case, a lifetime guaranteed death benefit is a must.
One last example is someone with a retirement plan where one or both spouses depend on an income source from the other spouse. The most obvious example of this is those those with pensions that opted for a single life payout. But another common scenario of this is couples for whom Social Security Benefits play a big role in their retirement income needs. Should one spouse die, the surviving spouse can opt to continue whomever's Social Security benefit was higher, but he/she will lose the lesser Social Security benefit and therefore lose some degree of monthly income, which may create a dire situation.
In all three of these situations, the permanent death benefit aspect of whole life insurance can cover the needs and remove the worry associated with death no matter when it happens.
Cash Accumulation Feature
All whole life policies accumulate cash value; some better than others. In addition, the cash accumulated in a whole life policies enjoys some significant tax benefits. People who seek out whole life insurance for its cash accumulation focus on three major goals:
- Supplemental retirement income
- Cash and/or Bond alternative
- Some iteration of self banking/alternative financing
Whole life insurance can be one of the many tools people use to generate income in retirement. The policy owner is free to use the cash accumulated in a whole life policy at any time and for any reason. Boosting whole life insurance even further as a tool for this purpose is the fact that distributions from policies can occur without income tax liability.
As an alternative to cash or bonds, whole life insurance has incredible safety of principal and a remarkably high return given this safety. For conservative savers, whole life stands out as a stronger way to grow wealth without subjecting hard-earned dollars to stock market risk.
Whole life insurance can also serve as an alternative source for financing various large purchases or investments. You'll find several books on this subject, and they all have something to do with a concept most commonly referred to as Infinite Banking®. Whole life insurance is the favored product to accomplish this strategy.
Life insurance products are constantly evolving to meet ever changing needs. Major health events can be extremely costly and are a leading cause of bankruptcies in the U.S. Many whole life insurance products offer living benefits, which provide access to a portion of the death benefit in the event the insured faces such a major health event.
Buying a whole life policy with a focus on these living benefits could simply provide peace of mind as protection from financial devastation created by a major health problem. However the most common strategy used by those who buy whole life insurance for this purpose is long term care planning. While life insurance policies aren't always as comprehensive as bona-fide long term care insurance, the living benefit of many whole life policies can go a long way to help defray the costs associated with aging and fragility. And just like long term care insurance, these living benefits can help someone maintain a higher degree of independence as their ability to live independently declines.
Why do People Think Whole Life Insurance is Bad?
There are a number of bloggers and financial media types of speak badly about whole life insurance. To them, any benefits to owning whole life insurance are strongly outweighed by its drawbacks. The majority of these people fall into two camps.
On the one hand, negative sentiments arises from an overall misunderstanding of how whole life insurance works. This might come from people who were at one time licensed to sell whole life insurance. It might also come from people who have never professionally held the ability to sell life insurance, but who spend time interpreting it from the outside.
The other group usually has a financial interest to speak badly about whole life insurance. This takes several forms. The most common are those with a financial product to sell that competes with whole life insurance and those who earn marketing commissions on competing products to whole life insurance.