Whole life insurance is an option that provides coverage for an entire lifetime. The primary obligation to you is that you continue to pay the monthly premiums on the policy. This option is sometimes referred to as a guaranteed policy because the issuer promises to keep the monthly premium at a constant rate over the lifetime of the policy.
If something happens to you when you are covered by whole life insurance, then the beneficiaries of your policy will receive the designated payout listed on your documentation.
It is a form of permanent life insurance that can make it significantly easier to process a claim should something happen. There are also additional costs to consider with this type of policy when you are under the age of 40 that may make it an unsuitable selection.
That’s why it is crucial to review the pros and cons of whole life insurance before agreeing to anything.
List of the Pros of Whole Life Insurance
1. Whole life insurance often provides cash value accrual.
When you make the monthly payments on full life insurance, then it will begin to build a cash value for you that has a guaranteed, tax-deferred growth. The actual amount you receive depends on the value of the policy you have, and how long you have been making the monthly payments. It is something that you can borrow against if necessary, although any death benefit would be reduced by the amount of the outstanding loan when taking advantage of the cash accrual feature.
2. Whole life insurance allows you to take out a policy loan.
Most policy loans that are available through your whole life insurance carrier are available on a tax-free basis. You would use this money just as you would any other loan, but it comes with a catch. You are using the collateral of your cash value to gain access to the funds that you need. This process does not provide you with cash dad is “no strings attached” as some people might try to lead you to believe. It’s not free money. There are expenses to consider. You will also be paying interest on whatever loan you take out when borrowing against this value.
3. Whole life insurance can sometimes provide dividends.
When you decide to take out a whole life insurance policy, then the investments which occurred over the life of the agreement can create an opportunity for dividend payments. This money is added to the value of your overall policy, then they are free of any income tax in the United States. That is because they are considered to be a return of your premium, even if you never see actual currency from this payment. If you do receive a cash return from a dividend payment, then this advantage will still apply. Make sure that you speak with your carrier to determine what consequences (if any) this may have on your overall financial picture.
4. Whole life insurance often comes with a fixed payment.
When you decide to enroll in a whole life insurance policy, then there is one significant advantage you will receive over a term-life option. Whether you decide to pay over your lifetime or a shortened period, the premiums you pay each month are guaranteed to stay flat. You no longer face the annual adjustments that come with other types of insurance like this. That makes it much easier to budget the expense of this product, especially if you happen to be living on a fixed income.
5. Whole life insurance gives you permanent coverage over a lifetime.
Once you agree to the terms offered in a whole life insurance agreement, then your policy will stay in effect over the course of your entire life. The same rule holds true for anyone that is covered with you on this product. There is usually only one way for this advantage to be taken away from you, and that is if you fail to pay your monthly premiums. As long as you stay current on your payments, then this insurance policy will offer a death benefit should something unforeseen happen to you.
6. Whole life insurance gives you an option to surrender.
If you find yourself in a sticky financial situation, then your whole life insurance policy can give you a potential out. When you start earning less for whatever reason, from unemployment to a cut in benefits, then you can take the cash value out of the policy instead of allowing it to lapse. Most policies offered under this form of life insurance give you what is called an “option to surrender.” That means you can turn the policy back in to the carrier to receive the cash value of it back in return.
7. Whole life insurance doesn’t require additional health exams.
If you are young enough when you start a whole life insurance policy, then you may not have a health exam to worry about to receive coverage. Older adults might be asked to take an initial physical to determine the status of their house before the policy will be issued. Once you get past that initial point of concern, there are no more health appointments that you must make to maintain your insurance policy. You will remain covered even if your health changes in the future.
8. Whole life insurance can provide you with a return in an uncertain market.
The conventional wisdom of a whole life insurance product is that it will pay about 5% interest before fees occur. Some policies might pay up to 7%. That means you could do better investing on your own instead of relying on this vehicle to help start growing your portfolio. When the markets start showing poorly, however, as they did in 2018, then you can potentially see a better return because of those conditions.
9. Whole life insurance policies can provide estate tax benefits.
If your net worth is more than $10 million, then a whole life insurance policy can be a way to begin the family-planning process to limit your final liabilities. You can include this option with trusts and gifts to begin reducing your tax liabilities, especially since the death benefit for these policies is tax-free. You did pay those premiums with after-tax dollars, which is why their structure is similar to that of a Roth IRA. Think about pursuing this option if you have some cash and you’re over 40 years old.
10. Whole life insurance can help you to start saving some money.
The entire point of this type of insurance is to help you guard against the financial consequences of an untimely death. If you’re unable to save enough money to make this happen right now, or you’re living paycheck-to-paycheck, then this option can give you an immediate benefit that provides a layer of protection for your family. When you find yourself in a situation that is similar to this, then purchasing a policy might make sense. It does offer a guarantee that other investments are unable to make.
List of the Cons of Whole Life Insurance
1. Whole life insurance is a complex product.
The goal of a whole life insurance policy is to provide you with the exact benefits that would be necessary if something should happen to you. The death benefit offered is intended to cover your final expenses, current obligations (like a mortgage), and other charges that you pay with your income. Adding the various benefits and features that are available to you from the provider that you choose can be a complex process. Most people need to work with a professional experienced in this industry to ensure they receive a policy that covers their needs at a price that is fair.
2. Whole life insurance is a costly product to purchase.
If you are under the age of 40, then term-life insurance might be a better option to consider. Although it won’t offer a lifetime benefit, the monthly premiums that you pay will often be significantly lower when compared to a whole life product. If you are unable to take advantage of all the potential benefits of this policy, then it may not be the right choice for you because of the expense. It is essential that you review the unique pros and cons of this product with a financial advisor to understand all of your potential benefits and risks before agreeing to anything.
3. Whole life insurance offers conservative growth opportunities at best.
When you decide to purchase a whole life insurance policy, then you will receive a cash value that is guaranteed to grow at a specific rate over the lifetime of the plan. If you compare this investment to the other options that are available through alternative vehicles, you may discover that there are better choices in some circumstances if portfolio growth is your primary objective. You will also want to determine what fees are applied to your policy because they can sometimes negate many of the growth benefits, leaving your loved ones the primary beneficiary of this option if something happens to you.
4. Whole life insurance can get you with high fees during the first year of the policy.
There is an excellent chance that the agent working with you on a whole life insurance policy will earn up to 80% of the policy’s first-year premium. If you are working with a term provider, then the insurance premium might be half of that cost. For middle income families that are looking for some guarantees if something unforeseen occurs, then these costs may negate the overall value of the policy altogether for them when they choose a permanent product. That can be a significant incentive to avoid this product altogether.
5. Whole life insurance can take a significant amount of time to build value.
It is fair to compare the value-building process that occurs with a whole life insurance product in the way that you would gain equity with a mortgage. The first couple of years that you start making payments will almost exclusively send your funds toward the interest due on the policy or loan. When you can hold onto the policy for longer, then it will begin to be worth more. Make sure to review your entire investment strategy within the policy before signing something because dividends are not always provided in some options – such as the Gerber Life GrowUp Plan.
You might be looking at 30-40 years of holding down a whole life policy before it begins to earn significant returns for you. Even then, you will need to look at your investment chart to determine if that is the right choice to make. Most people don’t start to break even until they’ve held their policy for at least 10 years.
6. Whole life insurance creates a middleman for your investment portfolio.
When you think about what happens with your monthly premium, then whole life insurance doesn’t make sense for some families. They will take that money, pocket the profit, and then put a percentage of the remainder into a pool that pays when a beneficiary dies for some reason. The remainder goes into conservative stocks and bonds that will grow slowly to at least maintain their value. Some people may find it better to invest directly in these slow-growth options with a lump-sum option to create your own beneficiary benefit over time.
7. Whole life insurance offers a projected amount that probably won’t happen.
When you start shopping for a whole life insurance policy, then you will see two amounts on the paperwork. The first is the guaranteed amount that you will receive no matter what. Then there is a projected amount which can be significantly higher than the first figure. Make sure to pay attention to these figures since most carriers have very little incentive to pay you more than what they guarantee. Look at the history of the company and what others have received from their policies to determine which end of this spectrum you’ll be able to enjoy.
8. Whole life insurance doesn’t give you many out.
If you invest in mutual funds, stocks, or bonds on your own, then you can cash them out at almost any time – assuming the market is open. That process gives you the opportunity to create cash liquidity whenever it might be needed. You don’t have that option when you make an investment in a whole life insurance policy. There are only two options available to you. There is a surrender option, which gives you a minimal return for the first 10 years at minimum or borrow money from the policy.
If you take out a loan, then you will reduce the benefit to your heirs if something happens. Even then, you’ll lose out on the interest that you pay on these funds instead of receiving them back like you would in a 401k. For some policies, if you borrow too much, then you can be forced into putting more in each year to maintain the validity of the policy.
9. Whole life insurance is not diversified.
You are investing a good chunk of cash with a single company when you decide to purchase a whole life insurance policy. Outside of the contracted guarantee you receive, you’re relying on their goodwill to offer additional returns. They make the investments, shave off the profits, and then pass on the remainder to their policyholders. All it takes is for a few bad years to change this guarantee into a “hopefully you don’t go out of business” situation. By putting a significant investment into this product, you start running with a higher risk that you could lose everything.
10. Whole life insurance is not always guaranteed.
Although you have a contractual relationship with an insurance carrier when purchasing a whole life policy, there is not much you can do if that company goes out of business. Make sure that you look at the numbers before and after the fees occur on the policy as well. You can still be pitched a “guaranteed” return with this product if it earns you a 0.5% return when fees are included after 40 years of ownership. That’s why you must always perform your own due diligence on a product like this instead of relying on content you find online.
The pros and cons of whole life insurance depend on what your financial objectives happen to be at this time. If the primary purpose for considering this product is to offer a death benefit to your loved ones, then there are cheaper products out there which can serve this need when compared to a permanent policy like this. If you want to take advantage of the cash value it can build, then this solution makes sense.
Blog Post Author Credentials
Louise Gaille is the author of this post. She received her B.A. in Economics from the University of Washington. In addition to being a seasoned writer, Louise has almost a decade of experience in Banking and Finance. If you have any suggestions on how to make this post better, then go here to contact our team.