Are Whole Life Insurance Policies Worth It?

If you've been doing a lot of research about the different types of life insurance, maybe you're wrestling with a big question…Is whole life insurance worth it? That's a simple question with a not-so-simple answer. It depends on what you want to accomplish.

If you're young, just getting started in your career and only have a couple thousand bucks a year to put away, buy term insurance for now. On the other hand, if you've got extra cash and an open mind, whole life insurance is worth a look. If nothing else remember this… There is a “right way” to setup whole life insurance if your primary goal is cash value growth.

Our focus within the life insurance industry is helping our clients maximize the potential for cash surrender value accumulation in a whole life insurance and indexed universal life insurance policy. We help a lot of people do this every year.

But at least a few times a week we're faced with questions like, “does it really work?”, “is it worth it?”, etc.

Best Decision I Ever Made

As a matter of fact, we've met a lot of people who own whole life insurance and most of them didn't buy policies from us.  And most of these discussions have started without us initiating any sort sales presentation. We never had any intention of selling life insurance to them and they had no intention of buying a policy from us.

When people ask my what I do for a living I tell them I sell life insurance.  I love having that answer.  I'm not big on small talk and that answer generally shuts people up quickly.

While the majority of people hear life insurance and look for an exit from the conversation, there are those who share their story. It's often been a tale of how they purchased cash value life insurance and held onto it for a while.  Fascinating stories to say the least.

Eyes light up a bit and they say something like “I have this whole life policy I bought from XYZ company back in 1970 something, and let me tell you that was one of the best decisions I ever made!”


Because that boring whole life policy now has a boatload of cash value that they'd never have if they'd tried to save it some other way–their words, not mine. I'm not coaxing that response from people.

Just how much cash value you might ask?  Let me give you an example.

Real Numbers from Whole Life Insurance Policies

Almost three years ago, we published this piece on the subject of “badly designed” whole life insurance and how it could work out quite well.  I want to recap the numbers from this example.

That article was special for two reasons.

  1. It had substantial historical data–36 years to be exact–on a whole life policy
  2. It reported numbers from a whole life policy issued by State Farm–a company that has completely changed focus away from dividend-paying whole life insurance

Using the data provided in the comment, we calculated the effective internal rate of return on this whole life insurance policy; it turns out it achieved a 6% return over those 36 years.  Could Jim (the contributor who shared the information on his whole life policy) have done better if he had invested that money in the stock market, rental property, etc?

Maybe. But who knows and would he have been willing to take on the risk?

Would he have had the intestinal fortitude to stay fully invested in 2000, 2001, and 2002 when the market fell by double-digit percentages for two straight years?

Who knows if he would have stayed fully invested in 2008 when losses would have been well over $100,000 as the market “corrected.”

Take a look at this chart, it gives you a great idea of what happened in the S&P 500 during that time period on an annualized basis. It also shows you the drawdowns that happened within each year. That last data point is so important and almost nobody talks about it, we're always focused on annual returns.

However, we all have to overcome our own emotions and markets don't fluctuate in perfect synchronization with the calendar. Take a look:

The one thing Jim likely never worried about during any market decline that came after he bought his whole life policy was where his whole life insurance cash value was.  He probably also never worried about it when CNBC, Bloomberg, or any other financial media outlet speculated that this or that major news headline “spelled trouble for the stock market.”

What About Policies That are Setup to Maximize Cash?

If plain whole life policies from yesteryear have worked out pretty well, what about the ones that were customized to produce boatloads of cash surrender value?

We took a recent look at policies we've put in force to compare against the original illustrations (projected values based on the current dividend rates at that time).  Most policies have been in force for five years and a few of them were issued by companies that have since reduced the dividend paid to whole life policyholders versus the dividend assumed when the policy was bought.

No denying that there has certainly been a reduction in results vs. the original projection.  We knew this could happen when the policies were put in force.The policyholder knew this could happen when the policy was originally put in force.

The difference, however, is not all that substantial.  In raw dollars, no policy is down vs. the original projection by any more than a few thousand dollars, which on average comes out to less than 1.5% off its original projection.  From an internal rate of return perspective, this comes out to less than 0.5% difference vs. what was originally projected on average.

For one company, the dividend hasn't changed in over a decade so none of those policies have cash values that were any different than what was originally assumed as long as the client paid the premium as originally planned.

Oh and here are the historical numbers from a maximized policy issued in the early 90's.  It achieved a return of over 7% for the years shared.

No One Seems to be all that Bothered

Despite some small reductions in dividends and lower cash value balances, we don't hear much in the way of complaints or concerns.  In fact, we've seen several policyholders take advantage of opportunities to increase premium outlay by dumping additional money into policies.  Turns out they are happy enough with how things have gone to place more money into the policies.

Does it make you curious to see how a whole life policy might work out for you? If so, feel free to reach out and have a discussion with us. Typically a short conversation can determine if it's a strategy worth pursuing.

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