Financial Freedom 101

Whole life insurance is known as a bad investment, but people still fall for purchasing it. Whole Life insurance is sold by sleazy businessmen who are looking to profit off collecting your premium payments. Whole life insurance can cost anywhere from 5 to 10 times more than a term life policy with the same initial death benefit. If you are wealthy, Whole life insurance is a great way to leave wealth to your beneficiaries, but for the average person, it is a waste of money, and your money is better off in a Roth IRA or a 401(k)

What is Whole Life Insurance

Whole life insurance is a type of permanent life insurance, which means the insured person has the policy for life if as long as they pay monthly premiums. The policy guarantees payment to your beneficiaries upon death. The policy offers a savings portion called cash value along with a death benefit.

According to the Insurance Information Institute, a Whole life insurance policy is the most common type of permanent life insurance purchased by people in the United States.

In most cases, the premium and death benefit stay constant for the duration of a whole life insurance policy; because whole life insurance gives you fixed premiums and a fixed death benefit, you won’t have to worry about increased premiums as you get older. Your loved ones will also know how much to expect when your life insurance benefit is paid out after you pass away. The Product builds cash value and can be used as emergency funds if a financial burden comes upon your life. You could even take a loan against the policy because a portion of each premium payment you make is put into a savings component of the cash value policy.

You cannot deduct premiums you paid for a whole life insurance policy on your tax returns, but f your beneficiaries receive the death benefit from your policy, they likely would not have to pay federal income taxes on that benefit. However, any interest earned on top of the death benefit will likely be considered taxable income. These policies seem very attractive and valuable at first glance when a sleazy businessman in a nice suit is trying to sell it to you, But some significant disadvantages should be looked into before purchasing a whole life policy.

The Disadvantages

The most significant Disadvantage to a whole life policy is COST. The cost of your insurance policy varies on a bunch of factors like your age, whether you smoke, the amount of insurance, and your health. But the cost of whole life insurance can easily exceed a term policy with the same death benefit by thousands of dollars a year. As a general rule, expect whole life policies to cost five to 10 times more than a comparable term policy. Insurance agents sell Whole life insurance to clients by stressing that a portion of the premium is invested in bonds, money-market products, stocks, and other financial products that collectively serve as a retirement fund. Again, this might sound fantastic as forced savings takes the savings responsibility out of your hands. But there are four significant disadvantages to keep in mind.

The first Disadvantage is you have no control over where the insurance company is investing your money. It is not like a 401(k) or Roth IRA where you chose where your money is invested, but instead, these insurance companies will put your money in their mutual fund that usually has a worse return than the S&P 500 has.

The second Disadvantage is the fees taken out of the premiums you pay are way too high, and that fee goes right into your insurance agent’s pocket. As an investor, I want my investment expenses to be below 0.5% and invest in an ETF, compared to fees of a whole life policy where investment fees can exceed 3% on an investment vehicle that will barely get you an 8% return per year.

The third, Disadvantage these policies loans are subject to interest. If you decide to borrow against your policy, your insurer will charge interest against you. This is ridiculous; if I were a holder of one of these policies, that would make me furious, and what’s even worse is that if you don’t pay it back before you die, they’ll reduce the death benefit beneficiaries will receive less money.

The fourth, Disadvantage is the amount of time it takes to build cash value. In the first few years, your premium payments pay for the crooked insurer’s fees and commissions, and a small percentage of YOUR MONEY goes towards your cash values. This means that it will take 10 to 15 years to accumulate the cash value you need to start taking out loans against your policy. The interest rates are typically low, and you won’t be taxed. In this way, whole life insurance functions as an emergency savings account.

Advantages

Although there are a ton of negatives to a whole life insurance policy, there are some positives. If you have 0 personal finance skills, Whole life insurance is a good place for your money to be placed.

The first Advantage is Whole life cash accounts grow tax-deferred. That means that the interest you’re paid isn’t taxed, as long as the money stays in the account. You’d have to pay tax only if you withdraw more cash than you paid in.

The second advantage is it has a minimum rate of return. Even when the stock market dips, your life policy’s cash value still has a guaranteed interest you receive as a policy owner. Since it’s not subject to market volatility, whole life insurance is a substantial investment for a risk-averse individual.

The third Advantage is it offers financial safety for your beneficiaries. When you die, your beneficiaries will receive a guaranteed death benefit. Unlike 401(k)s and IRAs that penalize you for accessing your money before reaching age 59 1/2, a whole life policy would allow you to borrow from available cash value for any reason and pay it back.

The fourth Advantage is dividends. Some whole life policies pay out annual dividends. This cash can be used to purchase additional life insurance that would increase your life insurance policy’s death benefit and cash value.

Conclusion

Overall I think Whole life insurance policies are a substantial corporate scam. There are certain instances where whole life can be useful. If you have a genuine need for a permanent death benefit, such as having a disabled child, it can serve a valuable purpose. Or if you have a considerable net worth and have already maxed out your retirement accounts its a good idea, but if you are an average joe looking to build wealth, a whole life insurance policy is a horrible investment; the majority of the people who own these policies are average joes, and are unaware of how bad of an investment it is. Many of us do not need a permanent death benefit and do not have the large amounts of money on hand to make these policies a reasonable investment.

Simple enough, you are better off investing your money in other things like a 401(k) or a Roth Ira; having control over what you are investing in is a much better feeling than having some Insurance guy trained to sell you a product that he is making money off of by having it be bought off of him. Whole life insurance is a bad investment for most people, and you are better off putting your money elsewhere, don’t let the guy in the fancy suit trick you into buying his premiums, it will not be worth it, and you are better off investing elsewhere.