Should I Buy Whole Life Insurance?

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21 Comments

1. 
   Kevin
   February 27, 2008, 7:18

   You forgot to mention that when you die, your heirs only receive the policy’s face value amount and the life insurance company keeps the investment portfolio you worked so hard (against their astronomical fees and expenses) to build up.
2. 
   Ron@TheWisdomJournal
   February 27, 2008, 20:39

   I have $1.5 million on me with a 20 year level term. I’m seriously thinking about raising it even more so that my wife would never have to worry about anything. We have three children and weddings to pay for and grandchildren to dote on. If I’m not here, I want her to be able to live as full a life as possible and life insurance will help do that.

   I have to say that I’m completely against whole life, though I do have it on all three kids. I bought it when they were two months old and it costs so little, I don’t even know how much it is!
3. 
   Pinyo
   February 27, 2008, 20:52

   @Kevin – I didn’t know that! I just sent my parents’ agent some questions. They were sold whole life policies that they have to pay until the day they die. I am looking into what we can do to recoup what we can at this point.

   @Ron – That’s the other school of thought. One is to give them enough to keep them afloat for a few years; another is to replace your portion of income for the spouse entire life-time.
4. 
   jason
   February 27, 2008, 21:14

   A couple other points. My wife and I are going through the same scenario.

   1. Life insurance payouts are tax-free whereas you will have to pay taxes in many other accounts (roth’s would be an exception but you should probably fund one of those anyway.) And this could be a way to offset any estate taxes.

   2. If your whole life policy is fully funded, you could borrow against it while you’re still living making it an investment vehicle if your pre-tax account balances would have you paying more taxes in retirement than you would while working. There’s a fed reserve article floating around somewhere that details the break-even points for income, rate of savings, and pre- and post-retirement taxes.

   3. Kevin isn’t entirely correct. You can take the cash-value of the policy at any time after it’s fully funded or you can let it continue to build or you can leave the policy in place and collect the dividend. All of this income is tax-free because it’s life insurance. This also makes whole life policies good investment vehicles.
5. 
   Make Friends, Earn Money
   February 28, 2008, 4:20

   Insurance is always a difficult subject. It’s important to have especially if you have children but, like you mention how much is enough? I think a basic insurance package is essential but I think that insurance companies also prey on our fears about what can happen. If you combined a basic insurance package with a good savings programme, personally I think that this is a better option than investing large amounts in high coverage.
6. 
   Adfecto
   February 28, 2008, 9:56

   Whole life is a huge rip off for most people. Stick to a combination of a strong savings plan and fixed term life insurance. If 30 years from now you need a large death benefit you’ve done something wrong along the way.

   Estate planning does have some use for whole life style policies but most people won’t have an estate that is large enough to need to duck the estate tax and gift tax laws.
7. 
   Suresh
   August 3, 2008, 16:26

   I think a basic insurance package is essential. There is no point in going with heavy policies. And the insurance providers rob you off with the fees and charges
8. 
   JF
   August 18, 2008, 17:23

   It is always interesting to read comparisons of whole life insurance to a stock portfolio at 8%. First, in terms of good asset allocation, whole life insurance should be placed in the conservative after tax style, such as fixed income vehicles. In other words, you should not be 100% in the stock market – EVER. Eight percent is a great average, unless you are 65 now, and have been invested in stocks only for the past decade. The S&P has only averaged about 3.5% in these past ten years. The stock market is a NECESSARY place for investments, and the only true asset class that has proven to beat inflation in the long run, but proper diversification and asset allocation are a must.

   So back to using the buy term and invest the difference at an 8% CAGR. Try the calculation again using tax-free munis, CD’s, even high yield bonds, and pull out the cost of 20-30 years of level term insurance, and you will see that you can pull tax free from the cash value of the life insurance, still have a death benefit that you can use to cover estate taxes or to pay off a reverse mortgage.

   Oh yeah, most whole life is disability protected, unlike your other investments. If a prudent investor can allocate between 15 and 30% of his or her retirement savings to Whole Life (mutual companies such as Northwestern Mutual or New york Life), retirement income can be maximized.
9. 
   Pinyo
   August 19, 2008, 15:11

   @JF — That’s an interesting point you are making. I’ll be investigating the comparison of whole life insurance against these more conservative investments. If I recall my previous calculation, I think whole life insurance still underperform these.
10. 
    JJ
    August 25, 2008, 9:31

    JF’s points are important. I’ve preached “nothing but term, invest the rest” for a while. Recently, I’ve decided to become an insurance agent and have re-investigated the topic for myself. Even as a “Dave Ramsey-ite,” I’ve changed my opinions.

    It’s not as simple as buying term and investing the difference at 12%. Insurance contracts feature guaranteed returns and can’t be directly compared to stock market returns. They’re a different investment class and have to be factored into a complete investment portfolio picture. They’re much more stable, especially with established companies (e.g., Northwestern Mutual is more than 150 years old.) When stocks are up, everybody wants to be 100% in stocks. When stocks are down, many people appreciate having a portion of their portfolio in stable investments.

    Also, just as a broad range of mutual funds are available, there’s quite a difference between insurance companies’ policies. 95% of the several thousand insurance companies whole life rates of return are terrible. But these companies are whose rates are always quoted for consumer advice. This is a good thing for consumer protection, but a smart shopper can do better. Investigate the mutuality companies referenced by JF.

    Finally, tax savings are an important advantage and can make a significant difference.

    Consider your personal strategy and portfolio holistically. Level-term might likely be the best for you. (I think most personal finance bloggers are focused and disciplined and don’t need to think about “forced savings” habits, etc.) However, a quality whole life policy with the best companies might be an important part of your overall picture.
11. 
    NYFinancialPro
    October 10, 2008, 9:59

    JJ hit it on the head. A company like Northwestern Mutual has a long history of dividends and strong financial security. Right now you would be earning 7.5% on your cash value which most people on wall street wish there money was in now… Not to mention the death benefit, and the tax advantages….. I feel all people should own SOME whole life, and many times some term in their overall financial mix.
12. 
    Jerry
    October 13, 2008, 6:10

    Whole life insurance is not a bad plan but it just depends on what the needs and preferences are for your family. There are many companies that are selling policies that might be good for your situation. It’s worth it to check them out.
13. 
    Peter Parker
    November 18, 2008, 12:42

    The number 1 thing to remember is make sure you know what you want you life insurance to provide – most likely to provide your family with the financial support to make sure they live comfortably.
14. 
    Grant Rowan
    December 2, 2008, 21:28

    The number #1 thing everyone should understand first and foremost with the stock market is the difference between average and actual rate of return. Money managers preach average rate of returns of 7, 8, 9, even 10 percent. These numbers take certain time periods and average out the yields based on the number of years……this is completely inaccurate. The actual rate of return of the S&P over the last 100 years is 4.9%. You need to understand what Diviation is, the effect of managing fees have, the effect of taxes, etc. Whole life insurance is the foundation of any sound financial plan. Term and invest the difference people NEVER take into account the cost of the term insurance, the money managing fees, and diviation when calculating their stock market returns. Money is not math, there are many factors involved in building a stable, long-term plan that provides certainty. Those money managers now are changing their story with the recent plunge of the stock market……..7% average rate of return is a myth!
15. 
    Pinyo
    December 4, 2008, 12:08

    @Grant — I agree and I’ve written about the effect of expenses before. However, the last time I did my calculation whole life insurance return is actually less than inflation, so I can’t consider it an investment.
16. 
    Grant Rowan
    December 4, 2008, 15:12

    @Pinyo,

    Let’s not confuse asset classes. Whole life insurance is a saving asset, not an investment asset. If you really look at the benefits of whole life insurance when it comes to asset protection, sucession planning, tax minimization, disability protection, and the yield at the end, then you begin to have a shift of perspective as to what the product is. Whole life insurance should represent a percentage of your overall portfolio, it is not supposed to compete with higher risk products because that is not it’s function. Whole life is the rebar and concrete of your financial foundation, it allows you begin investing more aggressively with the knowledge that it will be there when things go bad. During retirment you will have that death benefit to cover all necessary expenses after death, allowing you to more fully enjoy the more high yield wealth you have created in the Stock Market, Real Estate, ETC. It’s about having all the tools, not just the flashy high yield ones.
17. 
    Jeremy
    March 16, 2009, 22:37

    It is worth it to check out your life insurance options with a local broker…especially if you have loved ones or a family. I am insurance with ING here in California and the rates are very affordable!
18. 
    James
    March 22, 2009, 23:43

    Grant, it sounds like you know a lot about the macroeconomic coordination of the protection, savings and growth areas of one’s life. Very nice!
19. 
    Will
    August 30, 2009, 8:26

    It is totally off the mark to compare permanent life insurance to an investment. We are talking about two completely different things here. Life insurance is first a risk management tool. The obvious risk is that you will die and leave survivors financially struggling. There are other risks such as disability which with a waiver of premium rider can be added to your policy that would pay the premiums if you become disabled. There are other risks such as attachments by creditors which life policy cash values have limitations in many states with respect to creditors. Another big risk which is actually more relevant is that you will actually spend money in your regular savings account if unrestricted access is permitted. If you don’t think that is a real problem consider the average $10k in credit card debt people are carrying because they can’t control their spending.

    There are three primary asset classes, stocks, bonds, and cash equivalents. The returned dividends from many whole life policies with a top company are earning somewhere around 4% after tax. Instead of comparing that to a mutual fund which is a true investment with a much higher risk factor, compare the cash value of a whole life policy to typical CD rates and it does quite well. The cash component of your portfolio if composed of your life insurance and your regular savings account is what can provide liquidity when needed without selling stock or bonds at disadvantageous times like a market down turn. You only get the long term gians in investments when you let them grow and here again life insurance functions as a risk management tool. To understand just how all aspects of your financial picture interact is the job of an ethical planner/agent and one who will take the time to understand your situation is where to start. One size fits all financial gurus spouting off on tv speak only in generalizations which are often wrong.
20. 
    Joshua
    August 30, 2009, 19:41

    @Will. Right on!
21. 
    Jonathan Poland
    November 8, 2009, 15:32

    So, do you think Insurance Companies can return 8% (or 7%) annually to their clients policies? I mean, that seems pretty unrealistic.