Most Americans have some form of life insurance. Knowing that ones loved ones will be take care of should sudden tragedy strike, or natural death occur, gives peace of mind to individuals.
Others want to know they have money saved should they need it for an emergency in later years, regardless of the payout to beneficiaries. Many people get confused when trying to decide what type of life insurance to purchase.
But is whole life insurance really a good investment?
First, what is it…
Whole Life Insurance
Whole life insurance is a permanent life insurance policy. It lasts throughout the policy holders life or until the policy holder decides to end or cash in the policy. As long a premiums are paid, whole life insurance continues. Payments are made monthly and the rate always stays the same.
With whole life insurance, policy holders can just leave the policy alone, keeping it active and collecting interest until they pass away. Upon the policy holders death, whomever was named as the beneficiary of the policy, will collect the pay out benefits.
However, there are other options and benefits to having a whole life insurance policy. Policy holders of whole life insurance, can cash in parts or all of the value of their policy at any time. Because whole life policies earn interest, policy holders often cash in on the interest alone. Thus they essentially leave the original value of the policy the same, only collecting the interest payments to help supplement their income or help pay expenses.
Policy holders can also choose to cash in all or part of their policy if they wish. Should an individual face a financial emergency or just want to go on a fun vacation, they may take out some of the money from their policy. The policy would remain active but would just have a lower pay out value. If one chooses to cash out the whole value of the policy, the policy would be closed and there would be no benefit payout upon death.
Another benefit is that policy holders can borrow from their whole life insurance policy. They can use the money that they take from the policy as they wish, temporarily reducing the pay out amount. However, once they pay the money back, the benefit amount would return to what it was before the money was borrowed.
Because whole life insurance policies are meant to be paid on for a long period of time, they do not typically benefit the elderly. The premiums would be very high on a whole life policy for someone of retirement age and this is where a term policy might be better.
Another drawback to a whole life policy is that if one chooses to withdraw money from the policy, they reduce the payout amount to the beneficiary. One may borrow money from the policy, with the intention of paying it back, but never get the chance, thus leaving the beneficiary with less of a pay out.
Mary Beth Storjohann, CFP from WorkableWealth.com has this to offer,
For clients I work with (which tend to be late 20’s to early 40’s young parents and families), term insurance is generally the road I recommend from a cash flow and complexity perspective.
Whole life policies come with a greater level of complexity, higher commissions, and are generally much more expensive than a basic term policy for the same face value of coverage.
A big part of the discussion is educating and discussing what clients view the insurance proceeds as protection for – mortgage pay down, college funding, income replacement, etc. Term can cover many of those issues at a much lower cost.
With cash flow a big part of the financial planning pie for young families, the focus is typically on having a funded emergency fund, debt paid down and taking advantage of employer sponsored and personal retirement savings options first. Term policies fit in nicely to add protection to these scenarios.
My Experience With Whole Life Insurance
First, let me say that I have never owned whole life insurance. I’m more the firm believer that term life insurance makes more sense for me and my family. Hence, why I have 3 individual term life policies on myself.
How I have experienced whole life insurance is through my clients. I have several clients that took out a whole life insurance policy many years ago (ranging from 5 years to 20 years). They were sold on the idea of having some life insurance with an underlying investment attached to it. Heck, it’s a good story for anyone to consider.
What has actually happened is this: They have paid on this policy for an extended period of time and while the life insurance is there, the investment portion is not. At least it’s not as much as the illustrations that were run by the insurance agent that sold them the policy.
The funny thing is that most of these clients continue to pay on their policies even though they really don’t need the insurance. If this is you, I strongly encourage to review your whole life insurance policy and see if it still makes sense in your overall financial plan.