Should You Buy Whole Life Insurance

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If you’ve been around long enough to read more than a couple of posts on our site or listen to any of our hundreds of podcast episodes, you probably think that’s an odd question. After all, aren’t we the guys that kinda known for helping clients buy whole life insurance and agents better understand how to position it with their own clients?

Both are absolutely true, we do help quite a few people that want to buy whole life insurance get the right policy in place.

Most of the time people are approaching us to buy whole life. We’re not out there knocking doors or pounding the pavement looking for people to convince that buying whole life insurance is the one true path to financial enlightenment.

If you’ve been around the life insurance business for a little while, you’ve probably heard that having people approach you to buy life insurance doesn’t happen. My sales manager even told us (my training class) that if someone calls you and asks to buy a policy, it means there’s something wrong.

He was convinced they probably just received a terminal diagnosis. Something akin to buying fire insurance when your house is already on fire.

Seriously, I’m pretty sure that Sales Manager training 101 teaches, “life insurance is sold, not bought” That’s one way to look at it but after being in the industry for more than a couple of decades combined, we have seen that sort of attitude cause more harm to people than it’s helped.

To us, it just always seems like one of those sayings that makes everyone in the room chuckle because it sounds cute. It reflects a degree of ignorance that chooses to find more creative sales techniques rather than learning how to effectively communicate the benefits of whole life insurance so that people will choose to buy a policy.

We’ve always refused to believe that it has to be sold instead of bought. Yeah, we probably could’ve made more money listening to that advice and learning how to be a “1000x Hardcore Closer”. But it’s not how we’re wired—it would come across as disingenuous anyway.

You could call us stubborn I guess but we’ve held on to the belief that if more people understood how whole life insurance works and the quantifiable benefits it provides, we wouldn’t have to be great at selling in the traditional sense. We really don’t spend time convincing or overcoming objections. Remember, in most cases, people who buy whole life insurance are making a long commitment that requires them to pay fairly large premiums.

Why does that matter?

It takes a while for a whole life policy to produce a positive return. If someone buys a policy and doesn’t understand that, chances are they will decide within a couple of years that they made a mistake and they will surrender the policy. In our opinion, that’s a terrible waste. We don’t need to overcome their objections, we need them to understand the time it will take to produce a desirable outcome before they choose to buy a policy.

If the time they need to wait bothers them, maybe they shouldn't buy whole life insurance. That would be better than not having a firm grasp of the pros and cons from the beginning and then jumping ship early on. Most of the time, what we see, is that it creates yet another person who’s convinced that whole life insurance is a big ripoff. Goodness knows we don't need more people with a bad taste for the product. 

Turns out that most people are more than capable of evaluating the facts, math, preferences and making their own decision. If after taking an objective look, they decide it’s not for them, that’s fine. There are plenty of people who look at whole life insurance and decide it looks like the right move.

Many times, the initial reluctance to consider whole (or really any sort of cash value life insurance) is based on concerns about getting an objective, third-party evaluation. I get it, it’s tough to know if you should buy whole life insurance?

Maybe it’s best to talk about who shouldn’t first

Who Can Rule Out Buying Whole Life?

We’ve probably talked about this before on the blog but there are definitely people who should avoid buying whole life insurance. Now, this isn’t an exact science but…

If you’re struggling to get by, paying your monthly expenses with only a few hundred bucks each month to spare, you can pass on looking at whole life insurance. You probably need life insurance—particularly if you have a family that relies on your income to keep going.

But you should look at buying term insurance. Having enough life insurance death benefit is way more important than owning whole life insurance in particular.

I’ll steal another catchphrase from life insurance sales manager 101…widows never ask (when receiving the check) if it were whole life or term insurance. Turns out both pay the death claim just the same.

In fact, most financial professionals will agree that having the appropriate death benefit in place is the foundation that supports the rest of your financial plan. Seriously, this may be the only thing financial planners, financial advisers and insurance agents actually agree on.

Based on our experience of doing this for more than a couple years, people on a very tight budget are best served by purchasing term life insurance to cover their family’s needs.

Now that we know who should avoid buying whole life insurance…

Who Should Consider Buying Whole Life Insurance?

There are probably dozens of valid scenarios that we could look at where a decent case for buying whole life insurance could be made. But here are three reasons we believe you should consider buying whole life insurance:

1.  Your Health History – this is probably not what you’re thinking. Many times in the life insurance industry, it’s pointed out that you’re probably as healthy at this very moment as you’ll ever be. That's based on the idea is that the trend is for most of us to have more health-related issues as we age.

If you’ve been through the process of underwriting for a life insurance policy, you’ll know that many times insurance companies will want to look at your medical records. For many folks, that’s no big deal…right now.

But consider all the conversations you have with your physician as you go through time and all the notes that are made in your charts.

As you move through time, it’s likely that the stack of paper in the file that composes your medical records will grow. I’m not trying to suggest that it’s always a bad thing but many times your file isn’t growing with lots of praise from your physician about your new healthy lifestyle. On average, we see people with new diagnoses, more prescriptions, and an expanding waistline as they age.

Eating more leafy greens and getting your heart rate up on a regular basis with exercise are definitely positive habits, don’t wanna detract from that.  But the point is that those things will probably not stop the growth of health information stacking up in your charts. And the probability is that every additional piece of information there gives underwriting more reasons to knock you out of the top rate classes.

What If You’re In Great Health?

Let’s put this all in context. The reason I talked about the negative things that could impact your ability to get a whole life policy as you age is to point out something that we’ve seen happen over and over during our time in the life insurance business.

In more than a few cases, we’ve worked with people who bought a series of term insurance policies during their lifetime. Now, I pointed out the virtue of term insurance just a few paragraphs back. And it’s all true—term insurance will provide a substantial death benefit for a bargain price…

Until it doesn’t.

What we’ve seen is that people will often have a need that they determine is finite. For example, I need this death benefit to be sure my wife has enough money to replace my income while the children are still at home. Or I need this death benefit to fund a buy-sell agreement with my business partner.

Because both of these needs seem to be finite (and they may very well be) we see people buy a 10-year or 15-year term policy in many cases. They do this a couple of times—it seems like a no-brainer when you’re young and healthy because the premium is so inexpensive. Depending on what sort of death benefit you need, probably a few hundred bucks a year.

They keep signing up for a new term policy when the current one comes to the end of the term. Usually, that works a couple of times but as you age term insurance gets pretty pricey or something about your health changes that knocks you out of being able to buy a new policy. Now you have no life insurance.

But let’s set aside the negative things that could happen to you that might knock you out of being able to get a policy. What if you live? What if you have longevity on your side?

Buying a whole life insurance policy is the greatest hedge against longevity. Remember, you have a great deal of flexibility with your whole life policy.

You can use the cash to create income that you might need as you age—either through policy loans or buy converting your cash value to a single premium immediate annuity through a 1035 exchange. There’s also an additional feature that’s not really talked about or thought about often. That’s the ability to change your beneficiary whenever you choose. You could buy the policy initially to provide for your children if you pass away while they’re young but as you get older you might choose to have a trust be the beneficiary.

I’m not talking about a trust for estate tax planning necessarily, though that could certainly be the case. No, I’m referring here to a simple testamentary trust that says, “when I die, the life insurance death benefit goes in the trust and the trust document dictates how the money is spent/distributed”

If you plan to live a long life, consider the benefit of owning whole life insurance that will be around when you are most likely to die. Term insurance is cheap for a reason—the insurance company knows that the probability of having to pay a claim is low.

Life insurance does its most impressive work if you still have it when you die.

2.  Business Succession Planning (funding your buy-sell) – Of course this is a very specific use case for whole life insurance and I understand all the arguments against using it to fund buy-sell agreements: it’s expensive, what if mine costs less than my partner, etc.

I get it, those are valid concerns but lemme share the most common scenario that we’ve seen play out here.

Two partners sit down with an attorney to hash out the details of their buy-sell agreement. The particulars are always a little different but the broad strokes are that the agreement will prevent one partner from being in business with the partner’s family if the partner passes away while the business is still a going concern.

There are really two distinct scenarios we see a lot…

a.  Business partners spend a decent amount of money with an attorney to write the buy-sell. They work out the details and sign the agreement. The next step is for them to purchase life insurance to “fund” the agreement. See, the agreement simply spells out that one partner will have the option to buy out the partner’s shares if the partner passes away. Where’s the money going to come from for the buyout? In most cases, the agreement assumes that each partner will have a life insurance policy to cover the agreed-upon value of the shares. However, many times the life insurance is never purchased.

b.  The partners have the agreement drafted by their attorney, they agree and sign the document. Then the partners both buy 10-year term policies because it’s the cheapest way to fund the agreement. Fast forward ten years, one partner is in perfectly fine health and buys another term policy. Yeah, it costs more than it did 10 years ago but it’s still pretty inexpensive. The other partner develops type II diabetes and has high blood pressure. His new 10-year term policy is gonna cost 4x as much as his partner. They don’t like the idea of paying for it, so they just do nothing and thus allow the agreement to stay in place but with no funding.

Consider the alternative…they both purchased whole life insurance from the beginning. Instead of looking at the premium as an expense, they viewed as an asset purchase over time. When you look at the premium paid to whole life insurance, you’ve gotta look at the net-cost over time.

Each year your policy gains cash value and if designed properly, you should have a positive return on your cash. Meaning that at some point your cash should exceed the premiums paid.

When you view it from that perspective, you can see how whole life insurance is a better alternative long-term than term insurance. The term policy will always be an expense as it doesn’t accumulate any cash to offset the cost.

3.  Forced Savings Plan – I know that it seems silly to believe that we all need to set up ways to trick ourselves into doing the things that we know we should do. But I’m gonna spare you the lectures, I’m only sharing my experience here and what we’ve been told by dozens of clients and potential clients over the years we’ve worked together.

This is going to sound like the world’s worst sales pitch from a life insurance agent but it is 100% true. Dozens of people that we meet who’ve had whole life insurance policies for a couple decades have said some version of this…

“I never would’ve saved this much money if I hadn’t been forced to pay the premium”

Now, the truth is that they weren’t actually forced to pay the premium. Life insurance companies don’t do anything to force you to make your premium payments.

But there’s something that most of us do psychologically when we get the premium due notice in the mail. We tend to view it as a bill and we view bills as something we have to pay, they’re not optional.

When you couple that feeling with an asset as powerful as whole life insurance, you’ve created a recipe for creating the pleasant surprise of accumulating a pile of cash down the road. So far I’ve not met a single person that looked back on that with regret.

Oddly enough, even the people that bought traditional, non-blended boring old whole life insurance policies are not unhappy 30 years later. We’ve had the opportunity to look at quite a few of these such policies and while more modern policy designs would have surely performed better, these people are not unhappy with their outcome.

I know there are plenty of financial gurus and bloggers that will point out the horrible returns generated by whole life insurance. They’ll say that could generate much a much better return-on-cash if you’d only bought beachfront real estate in Florida back in 2010 or simply dumped your money into passive index funds.

But the real question is this: the returns of whole life insurance are bad compared to what alternative?

It’s not that hard to find something that beats something else. My winters in Georgia are much warmer than Brandon’s winters in Vermont. So what?

I’ll gladly trade Vermont summers for Georgia summers.

Here’s my point…

Whole Life Insurance Controls the Controllables

Chasing returns distorts the things that you can control as it relates to accumulating wealth. You have very little control over the rate-of-return you achieve over time.

But you can control your behavior and that has a much greater impact on the success of your financial future.

For most people, focusing on the rate-of-return or on the expenses of a particular investment diverts the focus from our lack of financial discipline. The truth is that most of us (myself included) have a blind spot in our life that is costing us far more than less-than-great-returns or out-of-control-internal-expenses.

Most of us would rather contemplate ways to maximize our rate-of-return but the truth is that it’s more beneficial to focus on consistency.

When you get to your 60’s or 70’s, you could look back on what you did versus what you could have done with a critical eye. You could do the math and figure out what would have been the best thing for you to do for the past 40 years by simply looking at rates-of-return.

But here’s the thing…prior to that moment, there would have been no point in your life that you could make that same evaluation.

You won’t know how things work out until you get there. And maybe having something (like a premium due notice) show up in your mailbox reinforces the urgency and importance of stashing away your money for the future.

If you're curious how whole life insurance might fit into your life, take a couple of minutes to complete our “Is Whole Life for Me?” quiz. It gives you an easy way to find out if it should be on your radar.