Pros and Cons of Whole Life Insurance
If you’re in the market for life insurance, you may be considering purchasing whole life insurance. While whole life insurance has many great benefits, it may not be the best policy for your needs.
In this article we’ll explain the pros and cons of whole life insurance to help you determine if it’s the right type of coverage for you.
We’ll also explain a hybrid policy that combines term and permanent coverage with the option to adjust the amount of coverage you carry later in life, if needed.
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?
Whole life insurance is a type of “Permanent” life insurance which is designed to provide protection for the insured’s entire life. Whole life insurance policies typically guarantee coverage until the age of 100 with level premiums.
In addition, whole life insurance policies accumulate cash value over time and may offer the purchaser dividends. Most of the people we speak with believe that having lifetime coverage is a “no brainer,” but purchasing a large whole life insurance policy is extremely expensive and most people’s needs for coverage change as they get older.
In this article we’ll explain some strategies to help save money on life insurance while providing a lifetime benefit to your beneficiaries.
Most of our clients need life insurance until their mortgage is paid off and their children have become self-sufficient. Once these major life events have passed, they do not have a real need life insurance, but would still prefer to leave something behind.
We also have some clients that need life insurance for their entire lives. The right type of coverage can be ideal for funding a trust, leaving an inheritance behind, or reducing the estate taxes your loved ones will owe on the assets you intend to leave them.
Who Should Purchase Whole Life Insurance?
Whole life insurance is usually purchased to provide money for final expenses, avoid estate taxes or to leave an inheritance.
Paying For Burial Costs and Final Expenses
Whole life insurance is often ideal for people who want to purchase a small amount of coverage to pay for their final expenses and burial costs. This is because whole life insurance usually offers protection until the age of 100 or later.
Term insurance on the other hand typically expires by the time we turn 80. Most people outlive their term life insurance, which is why the rates are much lower than a whole life insurance which is designed to last your entire lifetime.
Avoiding or Reducing Estate Taxes
If you have a large estate, your heirs could owe taxes on the property you leave behind. When you pass away, your loved ones will be responsible for paying a 40% tax rate on the value of your estate that exceeds the estate tax exemption for that year.
As of 2022, the federal estate exemption is more than $12 million per individual. However, without new legislation, this number will drop to roughly $6 million on January 1, 2026.
To offset this tax liability, whole life insurance can be purchased to legally settle your estate’s debt to the IRS, allowing your loved ones to retain the assets you intended to leave behind for them.
To learn more about using permanent life insurance to reduce or avoid estate taxes, please see our estate planning guide here.
Leaving an Inheritance Behind
If you want to leave an inheritance behind for your loved ones, whole life insurance may be ideal. The death benefit from a life insurance policy is typically paid out as a tax-free lump sum, so clients often purchase these policies to help with expenses like the cost of their grandchildren’s college tuition.
Purchasing a small permanent life insurance policy will allow you to spend your retirement savings guilt free while still allowing you to leave something behind for your loved ones.
Whole life insurance policies can also benefit retirees since they provide a fixed premium, allow the insured to borrow against the accrued cash value, and provide a guaranteed death benefit to the insured’s beneficiary.
Whole life insurance tends to be a good fit for retirees because most retirees do not need as much protection as someone who has a young family that relies on their income, or large debts like a mortgage.
How Do Whole Life Insurance Policies Work?
Many life insurance agents and financial advisors consider whole life insurance policies to be a hybrid of life insurance protection and an investment tool. The two main components of whole life insurance policies are the cash accumulation and the death benefit.
- Cash Accumulation– When you pay your life insurance premiums, a small portion of this money will be entered into an interest bearing account. The funds in this account will be invested by the insurance company and they can be borrowed against in the instance that the insured is in a tough financial situation.
- Death Benefit – This should be the main focus of why you’re purchasing the life insurance policy. The fixed death benefit is the amount of tax-free money that your beneficiary will receive after you pass away. At minimum, you should leave them enough money behind to pay for any funeral costs and any outstanding debts you may have. Some outstanding debts that are often overlooked include medical bills, car payments, and credit cards. If you have any questions about how much life insurance you actually need, please see our life insurance calculator here.
Pros to Purchasing Whole Life Insurance
Some of the clients we speak to may benefit from purchasing a whole life insurance policy. Below are some of the pros of purchasing a whole life insurance policy:
- Lifetime Coverage – This is what makes whole life policies so desirable. As long as you pay your premiums, your beneficiary is guaranteed to receive the death benefit after you pass away. You don’t have to worry about “outliving your policy.”
- Fixed Premiums – Once the policy is “in force” the premiums, or cost of your coverage, are fixed and the death benefit is guaranteed. In laymen’s terms that means that the insurance company cannot raise your premiums or decrease your death benefit as you age.
- Perfect for Estate Planning – Since whole life insurance provides lifetime coverage (as long as the premiums are paid) it can be set up to reduce or avoid estate taxes. The influx of cash provided by your life insurance policy will help your surviving loved ones when estate taxes come due.
- Accumulates Cash Value – Whole life policies build cash value over time and they can be used as an additional investment strategy for high net worth individuals who have already maxed out other tax-deferred investments like a 401k. In addition, the policy allows the insured to borrow against the cash that the policy has accrued, similar to a loan from the bank.
Cons to Purchasing Whole Life Insurance
Although whole life insurance may be ideal for some, there are some downsides to purchasing whole life insurance as well. For some people, whole life insurance doesn’t make solid financial sense. Below are some of the cons of purchasing a whole life insurance policy:
- Investment Portfolio is Very Conservative – Whole life insurance policies do not provide a large return on investment. You’ll be better off investing into a 401 or accelerating the payments on your mortgage. At JRC, our agents rarely recommend purchasing any type of life insurance for investment purposes.
In addition, the life insurance companies have complete control on how the money is invested and usually it’s very conservative. Life insurance should be purchased to provide a death benefit to your loved ones once you pass away, the investment potential should not be your sole reason for purchasing coverage.
- Expensive Cost of Coverage – Whole life insurance policies provide lifetime coverage that is designed to provide a payout and this results in an increased cost of coverage. In addition, some of the money you pay into your policy is invested. These factors cause the whole life insurance to be more expensive than other life insurance products like term or guaranteed universal life.
- Your Life Insurance Needs May Change – As people get older they usually pay down their debts and eventually their children become self-sufficient. While you may cancel your whole life insurance policy at any time, you’ll have likely overspent on excess coverage that you didn’t really need.
- Repaying Borrowed Money – With whole life insurance, the money in your policy is never really your money. If you end up borrowing against your cash value, the life insurance company treats this withdrawal like a loan and it must be paid back with interest.
The Perfect Lifetime Insurance Policy
If you want permanent life insurance, but you realize that as you get older, you might not need as much life insurance, we have the perfect policy for you. A product known as guaranteed universal life insurance provides affordable lifetime coverage without an increased cost to build an investment value. In addition, as your need for life insurance changes, you’ll have the ability to reduce your premiums and the amount of coverage you carry.
Here’s How Guaranteed Universal Life Insurance Works
Not to be confused with traditional universal life insurance, guaranteed universal life insurance provides a fixed cost level cost and a guaranteed death benefit until the age of 90, 95, 100, 105, 1110, or even 121.
Guaranteed universal life insurance works just like a term life insurance policy and it does not require an additional investment value keeping it most affordable than whole life insurance. In fact, guaranteed universal life insurance is usually about half of the cost of traditional whole life insurance.
Guaranteed universal life insurance is a great fit for estate planning and most companies because you can purchase large amounts of coverage at a low price that is fixed until the age of your choice. In addition, if your needs or budget changes, most guaranteed universal life insurance policies allow you to adjust the amount of coverage you carry if needed.
For example, if you decide to purchase a $2,000,000 life insurance policy when you purchase your home, you can reduce the policy to as low as $100,000 when your mortgage is paid off. The same holds true if your budget changes when you retire and you can no longer afford a large payment each month.
You can also layer a guaranteed universal life insurance policy with a term policy to provide a large amount of coverage until your primary need for the coverage has diminished. We explain layering life insurance policies in further detail here.
How We Can Help You Pick the Perfect Life Insurance Policy
Purchasing a whole life insurance policy is literally a lifetime commitment. Before moving forward with a policy, make sure that it’s something that fits your needs. In addition, it’s also important to consider the cost of the coverage and whether or not it will remain affordable when you retire and are on a fixed income.At JRC Insurance Group, our agents are experienced in helping our clients find the perfect policy to suit their needs. We take a consultative approach in order to educate our clients so they purchase the policy that fits them best. We would love to answer your questions and address any concerns about life insurance that you might have.
Our agency works with over 50 top-rated life insurance companies which allows us to “shop the market” for our clients to find the most affordable life insurance options available. Give us a call today, toll-free at 855-247-9555 or request a free quote online below.
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.