This entire post is dedicated to saving you thousands of dollars a year on whole life insurance. It’s a complex topic since those policies are ridiculously complicated, and you can get super detailed talking about all the variations of whole life. So what I’ve done is broken it down into the four main reasons why you should never buy whole life insurance, and only stick to term.
A good rule of thumb is to keep your insurance and investments separate. You buy insurance to get rid of major financial risk. You buy investments to build wealth.
This stuff doesn’t work like bundling your wireless and cable bill. Quite the opposite: you end up spending more and getting less.
A simple way to figure it is to take the monthly premium for a whole life insurance policy and compare it with the equivalent of a 20 or 30 year term policy. (I will use the term whole life interchangeably with universal and variable index, even though there are differences we’re not getting into all the tiny details).
The same term policy that costs $20 a month will run you around $200 a month for whole life.
What if you invested the difference of $180 yourself in some stock mutual funds earning 10% interest?
Answer: You’ll have a lot more money.
Why the difference? A whole life policy is good for one’s entire life (you won’t need life insurance your whole life, see point 4) so you’re paying for the extended term. You’re also paying for the investment component since the policy builds a cash value.
But, you’re also paying for fees. Lots, and lots and lots of fees. To the point where it makes more sense to save money in a piggy bank because by the time you receive your paltry cash value amount, you’ll wonder who’s getting rich off YOUR money.
Insurance agents will try to sell you on the idea that your insurance policy can be used for anything from college tuition to a house down payment. Why put your money in “risky” investments that can’t guarantee a return?
Okay, let’s break this down. First of all, you can borrow from your whole life insurance policy, but you can’t continually withdraw money penalty-free for multiple objectives.
And if you borrow, you’re hit with even more fees. Plus, borrowing means you’re in debt, no matter how you spin it. There is no such thing as borrowing from yourself. Borrowing from a life insurance policy means you owe the insurance company.
Second, the idea that investing in the stock market is imprudently risky is completely absurd. Yet this is the argument that insurance agents make to get you to invest in a whole life insurance policy.
The entire US economy would have to collapse and the US dollar be worth zilch before you lost all your money. This would essentially require losing World War III, in which case we all have bigger problems to worry about.
The point is, do not rely on whole life insurance to be an investment catch-all. Decide on your investing objectives, and use tax-advantaged plans such as 529s for college and IRAs for retirement.
Buying children life insurance policies is a fear-based decision. Yes, something bad COULD happen to your child that would make him/her uninsurable in the future.
Honestly, there are worse things in life than being uninsurable. We have to go back to the purpose of insurance: to transfer financial risk.
The statistical likelihood of your child becoming uninsurable before reaching adulthood is low. It’s not impossible, but the risk is not high enough to warrant wasting thousands of dollars on a terrible financial product.
Always go back to how much risk you are mitigating by purchasing insurance. The numbers simply don’t make sense to purchase whole life insurance for your child.
If you do not have a full emergency fund saved, you can add a $10,000 rider to your own term insurance policy that would cover final expenses for your child if the unimaginable happened. This is much cheaper and you can drop the rider once you have a full emergency fund.
One of the supposed advantages of whole life insurance is that it is good for your whole life. However, you don’t need life insurance forever.
The goal should be to become self-insured. What this means is that if you or your spouse died after a term insurance policy lapsed, you would have enough saved for retirement, have the house paid off, and have an emergency fund. Thus, there would be no need for insurance money.
Not to mention, whole life insurance gets more expensive as you age. After all, when you’re 70 and still have life insurance, you’re statistically more likely to die than a 30 year-old, so it makes sense the insurance company wants you to pay more.
But did you also know that with a whole life policy, your beneficiaries lose the invested amount upon your death? They still receive the face value of the policy, but the insurance company keeps all that money you “invested” with them!
Finally, please know that a lot of well-meaning people give very bad advice. Just because your neighbor’s friend sells whole life insurance doesn’t mean it’s a good idea to buy it.
Insurance agents appeal to irrational fears about stock market uncertainties and reasons you may want to borrow from the policy down the road, but when you look at the policy for what it is, you’re lining the insurance company’s pockets at the expense of your own financial wellbeing.
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