It seems that a LOT of agents want to push whole life insurance.
But are there any downsides?
Many of our clients ask us for whole life when they call, but after we explain the pros and cons of whole life insurance, they buy term life insurance or universal life instead.
And since this is such an important topic, we’ve laid out the all the advantages and disadvantages to whole life insurance so you can make the best decision for your family.
Quick Article Guide:
First, let’s start with a very brief overview of whole life insurance and how it differs from term life insurance. Term life insurance is temporary, and covers you for death benefits only.
Whole life insurance covers you not only for death benefits, but also comes with an additional feature, which is known as a cash value accumulation component. Essentially, a part of the premium you pay goes toward the cash value accumulation portion.
This is an interest bearing account, so ideally, the cash value builds over the life of the policy from the premiums you add to the account.
There are several positive upsides to having a whole life insurance policy, so let’s look at them in greater detail.
A whole life policy covers you for your entire lifetime. The premiums you pay are guaranteed for the lifetime of a policy. Although the premiums appear more expensive than a term policy, you don’t have to worry about the premiums increasing as it may if you have a term policy, the initial term expires, and you try to renew or purchase a new term policy.
This way you can be assured that your coverage will be available down the line to help your family pay the mortgage and other bills.
Life insurance gets more expensive as you age, and the cost of renewing a 20-year term policy when you’re in your late forties or early fifties might be a bit of a shock. With whole life, your family will have insurance protection for your entire lifetime.
Whole Life Savings/Investment Feature
If you are not good at saving or investing money, then a whole life policy might be an ideal solution for you. Any money you invest in the stock market or other investments, and even the money you leave in a savings account earns interest that is taxable by the IRS.
However, one of the great benefits to whole life insurance is the ability, in some cases, to take non-taxable loans from the policy. Therefore, you might look at the money you earn on interest in the cash value accumulation portion as “non-taxable.” And like any type of life insurance, the death benefit is also non-taxable when it is paid to your beneficiaries after you pass away.
Whole Life Insurance is Guaranteed
Most whole life policies sold offer a guarantee. The premiums you pay are guaranteed, and you are also guaranteed a minimum rate of interest on the cash value accumulation portion on most policies. Although some people say the rate of return is low, this is not always the case.
When economic times are good, the rate of interest also increases on your account. When times change and investments plunge, you are guaranteed a minimal amount of return. Think of the “tortoise versus the hare” race.
Borrowing Against the Cash Value of a Whole Life Policy
Another convenient feature of a whole life policy is that you can borrow against the cash value accumulation feature. You can borrow up to certain percentage and after a set number of years and use the money anyway you wish.
You have the option of either re-paying the loan if you choose to do so. However, it’s important to note that if you don’t repay the money, it would affect the amount of your death benefit should you die later on and without having re-paid the money you borrowed. Also, the money you borrow is also non-taxable.
Let’s look at the other side of the coin and see what the cons are in having this type of policy.
Whole Life Is More Expensive
A whole life policy does cost substantially more than what you would pay for a term life insurance policy. This is because a chunk of the premium is used to cover the cash value accumulation feature. The larger the policy you buy – the greater the cost, which stands to reason.
Make sure you read the entire illustration or policy ledger and see the fine print in your policy to know how long it’s guaranteed for, as well as any exclusions the policy may have.
Low Interest Rates on Whole Life Policies
If you’re savvy with saving and investing money, then this type of policy might not be the best way to go. The interest rate you earn on the cash value accumulation portion could be considerably less than if you invested it elsewhere, such as a money market fund, the stock market, or other interest bearing investments.
Whole Life is Inflexible
A whole life policy is very inflexible compared to other types of life insurance policies, such as universal life, for example. You won’t know how your premium is being used, what portion of the premium is being applied to the death benefits, or how much is going to the cash value accumulation.
You generally have no choice about altering any aspect of a whole life policy. A universal policy, on the other hand, allows you to alter your death benefits and gives you some flexibility in how you pay your premiums.
No Investment Options on Whole Life Policies
A whole life policy does not give you any say in how the cash value accumulation is invested. If the investments made by the insurance company perform well, then you also benefit, but if they do poorly, then at best you will only get the guaranteed minimum rate of return.
Other policies, such as a variable life insurance policy, give more options in how the money should be invested and allow you to choose between bonds, a money market, or the stock market.
How is the death benefit payout taxed, you ask?
In most cases, life insurance benefits, whether from a whole life or term policy, are tax-free. See our article here: Do You Pay Taxes on Life Insurance Payouts?
A whole life policy isn’t for everyone, and you need to discuss your insurance needs with a knowledgeable independent agent who can give you the advice you need.
At JRC Insurance Group, we have helped thousands of families and businesses with their life insurance needs, and we can help you too! Our agency is licensed in all 50 states and we’re independently owned and operated.
As a non-partial, no-fee brokerage, our goal is match our clients with the best life insurance options available by shopping and comparing rates from more than 45 highly-rated insurers. By having access to dozens of companies and their guidelines, we’re able to save our client’s time and money.
Most importantly, our services as completely free, and there is no cost to apply for coverage. Give us a call toll-free today at 855-247-9555, or you can request a free quote online to compare rates and options from dozens of insurance companies in less than a minute.
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