Do You Need a Whole Life Insurance Policy?

Do you need a whole life insurance policy? When it comes to life insurance, most people knows very little about the subject, and the many alternatives available only add to the confusion. Typically, we don’t take enough time to sit down and understand each type of life insurance policy and which one is the best for our situation. The sad truth is that many insurance reps will start out by praising the virtues whole life insurance policy. But why?

Why Insurance Agents Love Whole Life Insurance?

Ahhh…I hate to say it, but money talks! The truth is that the whole life insurance policy is one of the highest commissioned products for an insurance representative. Since they can get more commission on a sale of whole life insurance compared to other products (for example, term life insurance), they most likely convinced themselves that whole life is the right product for everyone.

However, this doesn’t mean whole life policy is right for you!

What is a whole life insurance policy anyway?

In short, a whole life insurance policy can be summed up as:

  • You pay your monthly premium.
  • In return, the insurance company provides you with an amount of death benefit — let’s say $100k.
  • If you die while the coverage is active, your estate or your beneficiaries will receive the $100k.
  • As long as you pay your premiums on time, your coverage is active and can last your whole life (and this is why it’s called whole life insurance policy).

Now, if you want to go deeper into the product:

  • Some policies allow you to stop paying premiums after a period of time, but the coverage still remains. Basically, the money you have paid into your policy now earn enough to cover future premiums without the need for you to add more fund.
  • However, you may receive a call from your insurance rep after several years saying that “there is not enough money in the policy to pay the premium” and that you will have to start making payments again. Usually, this happens when the stock market goes south.
  • You can use your whole life insurance policy as a tax sheltered investment.
  • In addition to the death benefit, there are a ton of options, such as increasing your coverage without medical exams in the futures, borrowing against your policy, etc.

How much insurance do you need?

To answer this question, I would take a look at:

  1. How much debt do you owe that need to be paid off at the time of your death (such as a mortgage)?
  2. Do you  have financial dependents that will need the equivalent of a portion of your salary to maintain their lifestyle once you are gone (e.g., kids or a spouse with a much lower or no income)?
  3. Do you want to leave extra money behind?

And the life insurance policy should also cover:

  • Basic funeral expenses (about $15,000 to $25,000).
  • Money for taxes (if you have important capital gains to declare at your death such as a rental property under your name).
  • Other amount that would be required if you pass away.

Do you need a whole life insurance policy?

The key question to answer this question is to ask yourself: Will you still need this money if you pass away 15 to 20 years from now?

Here are a few things to consider:

  • For a mortgage, a term insurance is a better fit as you will likely have a paid off mortgage in 25 years.
  • For your kids, chances are that they won’t need your money in 10-20 years.
  • For your spouse, you want to leave enough behind so that he or she can maintain the lifestyle without you.

Personally, I am not a big fan of whole life insurance; however, having coverage of $50,000 to $100,000 is a good idea (to provide liquidity and pay for funeral expenses). The rest of your insurance needs would be better served by term life insurance.

Overall, the best advice regarding life insurance I can give you is to have your insurance needs reviewed by an expert. If the recommendation is one huge whole life insurance policy, challenge him on the reasons why he offers only one product instead of a combination.

Get your life insurance quotes now, or you can also check out these list of insurance companies that can provide you with free quotes:

About the Author

By , on Jul 30, 2010
Mike is the co-owner of Green Panda Treehouse. He is a financial planner and run several finance blogs. If you like this post, make sure to stop by Green Panda Treehouse and subscribe to his RSS feed.

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Leave Your Comment (10 Comments)

  1. Jim says:

    It really depends, do the term life insurance if you are young but if you are older go with the whole life insurance. It really just depends, do your research and talk to someone to find what’s best for you. Nice article, good info.

  2. Tim says:

    If you truly invest the difference not spent on a Cash Value policy then you will not need a small WL policy.

  3. Very interesting post. I agree wholeheartedly with the author that because of the high commissions associated with whole life insurance policies, most insurance agents will try to push this product over its more affordable counterpart that is term life insurance.

    However, you should do the groundwork before you sit down to discuss your insurance needs with your agent. If you are completely ignorant about the subject, chances are that you will fall for the smart talking agent’s arguments to buy a certain policy not knowing if that is the best option for your needs or not.

    I also like the author’s idea of a combination of products if you can afford them both – a big term life insurance policy to cover the big expense during the crucial 25-30 years of your life and a smaller whole life insurance cover to offset funeral costs and provide additional financial security to your spouse.

  4. sudan says:

    It will be better if we have the whole year life insurance policy because life will not finish immediately. We have to live for a long time. We should not ever thought that life insurance is not that important. If we obtain a good life insurance policy then we don’t have any fears about our family that they won’t be set for life should we have an untimely death.

  5. Kathy Brown says:

    You have clearly confused Universal Life insurance with Whole Life insurance. True whole life insurance can only be offered by a mutual insurer.

    While term is the cheapest way to a large death benefit, it is not the solution for everyone. Most people need term as well as some “forever insurance” which can only be found with a permanent policy.

    In addition, many people in the higher income brackets find that a whole life policy is an effective way to gather money to pay estate taxes and transfer wealth for less than 100 cents on the dollar. It offers tax free loans during life and leaves behind an income tax free death benefit. For many people who make too much money to have a Roth IRA or have topped out their 401k plans, permanent policies are a perfect fit.

    I think you rushed to produce this article without even bothering to research the definitions of the policies you are discussing. Too bad.

  6. Mike says:

    To be honest, I only have a huge term life insurance. I don’t really mind not having a whole life since I figure that my assets will be important enough in 20 years to cover all the remaining financial needs.

    @Evolution of Wealth,
    Thx for the distincton!

  7. I tend to agree with Kris. I do have a whole life policy for 100K. I consider it another type of investment. It does offer some guaranteed returns.

    Term does have some advantages, namely the price. If you are going to get a term policy, do it while you are young and the rates are most favorable.

  8. Kris says:

    Good question. For years I followed the “buy term and invest the difference” philosophy but recently I did buy a whole life policy, since the term always has an end where you get nothing. I’m no investment whiz but I figured a little of both (after much research and discussion) was probably a good idea.

  9. Jerry says:

    I agree that term life insurance is better than whole life insurance. But, looking over your own situation meticulously will lead you to the right decision.

  10. I just wanted to make a distinction on what you said. When you mention being able to stop paying on a whole life policy there is two ways to do that. One is the way you said where there is enough cash value to cover future premiums. The other is when a policy is paid up. This means that insurance charges no longer come out of the policy.

    With participating whole life insurance the cash value is made up of guaranteed returns and dividend participation. Once a dividend is received you can’t loose it. It’s not like Universal Life policies where your cash value can fluctuate from year to year. When you mention needed to pay more monies later on that should never happen with whole life insurance (I say should because their are some horrible insurance people out there that don’t know what they are doing). I’ve seen it happen a ton with universal life policies. I’m afraid you might have got the two confused.

    The cash value of top rated mutual insurance companies is invested in high quality bongs. It has very little if any correlation to the stock market. In fact if the “stock market goes south” it might just perform better as bonds have been known to do.

    One last thing, you mention buying $100k in whole life insurance and it paying out $100k when you die as long as the premiums are paid. With participating whole life you would most likely receive more than the $100k you originally purchased because of the dividends that are received over the life of the policy which will cause the face amount of the policy to increase. As long as you have cash value in the policy you can miss a premium payment and not worry about loosing your policy right away, not that I recommend this but it provides more leeway than term insurance in this area.

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