Is whole life insurance worth it?

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If you’ve been considering investing in a life insurance policy, you’ve probably realized by now that there are a broad range of products on the market. The challenge is understanding the financial pros and cons of investing in each type in order to determine what the right option is for you.

One of the most popular types of insurance is whole life insurance, which can be appealing as a way to provide a death benefit to your beneficiaries while also serving as an investment opportunity for you. But is whole life always your best option? Let’s take a deeper dive and find out when whole life is a good option — and when it’s not.

What is whole life insurance?

There are two main types of life insurance: term and permanent. As a type of permanent life insurance, whole life stays with you throughout your life (unlike term insurance, which only lasts a designated period of time). Once you purchase a policy, as long as you continue to pay your premiums, you will be assured of a death benefit after you pass away.

But there’s more to whole life policies than that. They also feature an investment component. Your premium payments go toward funding your death benefit and paying administrative costs, but a portion also gets tucked into a savings account where it grows throughout the life of the policy. This amount, called the cash value, can be borrowed from during your lifetime if needed.

Is whole life insurance a good investment?

The simple answer: it depends. It pays to put some thought into what you hope to achieve with a whole life policy, and to look carefully at the return on your money that you will achieve through the cash value.

For people who just want a life insurance policy that pays a death benefit and nothing more, term insurance is a better option. It’s inexpensive, easy and protects you for a term of years that you decide on. The money you save on premiums can be invested elsewhere as you see fit, taking into account your comfort level with risk.

Whole life insurance, meanwhile, will be three to four times more expensive than term, although some of that comes back to you through the policy’s savings component. Your money will have been invested in low-risk, low-return funds, so the interest won’t be as high as if you invested in the stock market or another more volatile option over the long term.

Unless you are financially conservative and just looking to protect your capital, it’s probably not a good idea to use a whole life policy as your primary investment vehicle.

Pros and cons of whole life insurance

Pro Con
Provides death benefit for your beneficiary Policies are more expensive than term insurance
Stays with you your entire life (as long as you pay the premium) Taking a loan reduces death benefit unless you pay it back
Premium rates are guaranteed Cash value accrues slowly, with low interest
Able to borrow from cash value of policy on tax-deferred basis More complex than term insurance
Forced savings component builds wealth Equity not available for first decade or so
Can be one part of a balanced financial portfolio

Should I buy whole life insurance?

Whole life insurance isn’t the right choice for everyone. The cost makes it prohibitive for many, and those looking for an aggressive investment vehicle will be disappointed in the returns they get from their whole life policy.

If you are a higher-wealth individual, however, and are searching for a way to defer taxes while accessing the policy’s value, a whole life policy may make sense as one component of your financial plan.

It may also be a good choice if you have difficulty with saving money by other means. The regular premiums become a kind of “forced” savings for you, with money building up almost without you noticing.

And if you want to provide for your loved ones in the event of your death, but suspect you may need an influx of cash down the road, whole life may be a perfect option.

Let’s say, for example, that you have three children, all under the age of five. You want a policy to protect your family, of course, but you are also looking ahead to college tuition in 15 years or so. By that time, you will have built enough equity in the policy to pay off some of those college bills.

Alternatives to whole life insurance

If whole life insurance doesn’t fit in with your financial plans, you still have some solid options for life insurance.

Term insurance

As we’ve said, term insurance is an excellent option if you want a simple policy with one purpose: paying a death benefit to your heirs. It’s inexpensive and you can choose just how long you’d like the policy to remain in force. The drawback? There’s no cash value to the policy, and once the term ends, you no longer have coverage.

Universal life

Like whole life, universal life is a type of permanent insurance that stays in force as long as you pay the premium. There are a couple of different types of universal life, based on how the cash value is allocated. Indexed universal life is tied to a market index and will fluctuate accordingly. Guaranteed universal life is a low-risk option that protects your investment. Variable universal life is similar to indexed, but allows you to diversify your investment through money market accounts.

Guaranteed issue life insurance

Most life insurance requires you to take a medical exam when you apply, but guaranteed life does not. This makes it a good option if you are older or have health concerns. Like other permanent policies, it pays a death benefit and there is a cash value that builds over time. It generally has a low maximum death benefit, often around $25,000.

Final expense insurance

Also known as burial insurance, final expense insurance is a type of guaranteed policy that does not require a medical exam, and is intended primarily for your heirs to be able to pay for the costs of your funeral and other post-mortem bills. Like other forms of guaranteed policies, it has a low payout cap that’s generally around $25,000.

Frequently asked questions

Can I earn money with my whole life policy?

You’ll earn some interest on the cash value of your policy. Your insurer will invest the cash value portion of your policy in low-risk accounts that will build equity, but not as fast as if you had invested the money in another vehicle, such as a money market fund.

How long does it take before I can draw on the cash value of my policy?

Generally, you’ll want to leave the cash value alone for a decade or so. At the beginning of your policy period, most of your premium will go to administrative fees and building the death benefit. It will be some years before there is significant accumulation in the cash value portion of the policy.

How much whole life insurance do I need?

The amount of life insurance you need varies from person to person. One way to calculate it is to consider a policy that is 10 to 15 times as much as your annual income. Depending on your responsibilities, however, you may require additional resources.