Is Whole Life Insurance Right for You?
Whole life insurance is one of the most misunderstood types of life insurance on the market. Despite the misunderstandings, whole life insurance is the most popular type of life insurance in the United States.
This is probably due to the fact that whole life insurance policies are often marketed through the mail and on television by celebrity endorsers. These policies offer lifetime coverage, but most of the clients who call us seeking whole life insurance are surprised by the lesser-known pitfalls and end up purchasing a different type of policy, such as term life insurance or guaranteed universal life insurance.
Before we get into the basics of whole life insurance, let us say that we have no reason to steer you to or from any specific type of life insurance. We just want you to know the facts before you buy a policy that causes you headaches down the road.
We are an independent life insurance agency, which means we do not have contracts with any one provider. Instead, we shop the entire market to find you the best coverage at the best rate. With that said, here’s the inside scoop on whole life insurance.
Here’s what we'll cover in this post:
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Here’s what we'll cover in this post:
What Is Whole Life Insurance And How Does It Work?
Investopedia explains whole life insurance with the following definition:
“Whole life insurance is a contract with premiums that includes insurance and investment components. The insurance component pays a predetermined amount when the insured individual dies. The investment component builds an accumulated cash value the insured individual can borrow against or withdraw. This is the most basic type of cash-value life insurance.”In our own words, whole life insurance is permanent coverage with a death benefit plus an investment. Part of the premium you pay will go toward your cash value accumulation, which will theoretically build over time. However, it’s important to note that this cash value is very minimal even if you’ve had your policy for a number of years.
A lot of clients we work with are surprised that the cash value in their policy is only a few hundred dollars, even after they have paid into their policy for over a decade. In addition, not all forms of whole life insurance offer permanent life insurance. Many whole life insurance policies actually stop offering coverage at the age of 80.
Common Misunderstandings About Whole Life Insurance
Many whole life insurance policies seem like a great policy because they offer some attractive features, such as:
True to its name, some whole life insurance policies offer peace of mind in knowing your spouse or heirs will receive a payout no matter when you die. However, it’s important to review the fine print before you sign up for a new policy.
Warning:Not all whole life insurance policies offer lifetime coverage. Many life insurance policies that include the “Level Benefit” policy offered by AARP actually cancel your coverage at the age of 80. Buying affordable life insurance after the age of 80 is almost impossible.
Some whole life insurance policies offer guaranteed premiums for the life of the policy. This means that the rates for your life insurance policy can be “locked in” with a guaranteed monthly cost, but this is not the case with every policy.
Warning:Many whole life insurance policies increase in price every 5 years. As an example, if you purchase the Level Benefit Term Life Insurance plan from AARP at the age of 60, your rates are $109.00 per month for $50,000 of coverage. By the age of 70, the rates increase to more than $200 dollars a month. By the age of 75, the policy costs more than $300 per month.
No Medical Exam
If you are in poor health or are coming off of a serious health issue, whole life insurance may offer you the opportunity to apply for protection without having to divulge your medical details.
This may seem advantageous because having a serious health issue could otherwise preclude you from being able to qualify for coverage. Any life insurance company that offers “anyone” an insurance policy without a medical check has some drawbacks.
Warning:While it may seem like skipping the medical exam is to your advantage, most life insurance policies with no medical exam or medical questions have a two-year waiting period. This means that if you pass away from any health-related issues during the first two years of your policy, the policy will not pay your beneficiaries the full death benefit.
At JRC Insurance Group, we only offer whole life insurance policies with guaranteed rates and coverage until the age of 100. These policies are guaranteed not to increase in price as you get older and your policy will be active until you reach the age of 100.
Drawbacks of Whole Life Insurance
Even if you decide to purchase a whole life insurance policy with fixed rates and guaranteed coverage until the age of 100, there are some additional drawbacks to purchasing a whole life insurance policy.
Since the insurance company is not able to assess risk, rates for whole life insurance are much, much higher than other types of coverage. The cash accumulation feature also requires management fees that add to the cost of your policy.
Whole life insurance might be ideal for someone who smokes, because the insurance company does not ask about their unhealthy habits. Someone who does not smoke and takes excellent care of themselves, on the other hand, is getting a poor draw in the average between healthy and unhealthy applicants. It’s better to pay for your own lifestyle and not everyone else’s.
Some agents will try to convince you that the “cash accumulation” is a winning investment, but we are wary of any cash value life insurance policy. Understand that your investment comes with a market risk. If the market doesn’t perform well, neither will your policy. Whole life insurance policies also rarely offer a fixed death benefit, and the rates can change over the life of the policy.
Limited Face Amount
Again due to the forfeiture of a medical exam, whole life policies are usually limited to $50k in coverage or less.
Potentially Better Options
There are other, often more cost-effective, ways to find permanent life insurance. Consider the following:
Term Life Insurance
Term life insurance gives you coverage for a set number of years, usually in 5-year increments. It provides a death benefit at a fixed premium for the length of your term, after which you can choose to convert the policy to permanent life insurance until the age of 100 or later.
Most people who are relatively young and in good health buy term life insurance to protect their family through the time in life when they have the most debt (mortgage, college tuition, etc.).
This allows them to get the highest amount of coverage at the most affordable rate, while they need it most. Then, once they have met their financial responsibilities, they convert their term policy to a permanent policy.
Whole life insurance is typically 3 to 5 times more expensive than a 30-year term policy for a 40-year-old male. According to most financial advisers like Dave Ramsey and Bob Brinker, the cost savings over those 30 years make term life a much smarter choice. Instead of pouring money into your life insurance policy, you can pay off your mortgage sooner, or save your money until you are self-insured.
If you still need coverage when your term is getting ready to expire, you can convert all or some of your coverage into a permanent policy. Another advantage of this strategy is that you do not need to re-qualify for coverage. The insurance company will not require a new exam or check your medical records, even if you have serious health issues.
Guaranteed Universal Life Insurance
Guaranteed universal life insurance (GUL) acts as permanent coverage, but without the bells and whistles that often overcomplicate whole life policies. With a GUL policy, there is no cash accumulation, which equates to no management fees or fine print. This helps to reduce the cost of coverage and also makes your policy easier to understand.
GUL functions similarly to term life insurance, except instead of your term lasting a set number of years, it lasts to a specified age (90, 95, 100, 105, 110, and even 121). You get the best of both worlds: the permanent protection of whole life, with the simplicity and affordability of term life.
One of the main differences between whole life and GUL is that GUL requires a medical exam, which becomes advantageous to you if you are in decent health. Even with diabetes, high cholesterol, or a history of cancer, insurers will usually view you favorably as long as you are taking care of yourself.
Learn more about guaranteed universal life insurance.
Let’s Find The Right Coverage For You
At this point, you might be experiencing information overload. We share a wealth of information and insight here on our blog, not to overwhelm you but to give you a 24/7 resource for all of your life insurance needs. Our online content is simply an outlet for our knowledge.
If you are considering purchasing whole life or any other type of life insurance, contact JRC so we can walk you through the process. First, we will identify which type of policy is best for you, then we will help you apply and find the best rate possible. Call us today at 855-247-9555, or click the button below to get a free life insurance quote online.
Managing Partner and Co-founder
Cliff is a licensed life insurance agent and one of the owners of JRC Insurance Group. He has helped thousands of families of businesses with their life insurance needs since 2012 and specializes with applicants who are less than perfect health. In his spare time he enjoys spending time with family, traveling, and the great outdoors.