Whole Life Insurance
If you listen to financial experts when it comes to life insurance, they nearly all say you need to have term insurance, not a whole life policy.
In fact, there’s even a standard saying to describe the term life advantage: buy term and invest the difference.
But despite that advice, are there times when whole life insurance is the right choice?
Here I’ll lay out the information so you can answer, “Should I buy whole life insurance?”
The advice from financial experts isn’t wrong.
In most cases, term life insurance is the better choice. The fact that it’s much less expensive than whole life insurance not only means more affordable premiums but also the ability to purchase a larger policy.
But rather than following the conventional wisdom, let’s explore the case for whole life insurance.
The Benefits of Whole Life Insurance
While acknowledging that term life insurance has a major advantage when it comes to premiums, let’s consider the benefits that are unique the whole life insurance:
- Permanent coverage: Once you’re approved for a whole life insurance policy, it can’t be canceled other than for nonpayment of premiums. With some term policies, an insurance company can decide not to renew if your health has deteriorated.
- Fixed premiums: The built-in disadvantage of term insurance is that your premiums are guaranteed to rise at the end of the policy term. But with whole life, your premium remains fixed for life.
- Cash value accumulation: Term insurance is pure life insurance – it provides a death benefit, and nothing more. But whole life builds up a cash value that pays dividends. Over time, the cash value can become substantial.
- Dividends paid on whole life are not taxable: As if earning dividends on your cash value isn’t a big enough benefit, they’ll also be tax-free in most cases. That can allow even faster cash accumulation.
- You can borrow against the cash value: Whole life insurance policies typically have a provision enabling you to borrow against the cash value. You won’t need to qualify for the loan since it will be collateralized by your cash value.
- The policy may become paid up: Whole life insurance policies typically have a provision that will result in a “paid-up policy”. After so many years of making your premium payments, the cash value will be sufficient to cover the premiums. At that point, you’ll have cost-free life insurance.
With these benefits in mind, let’s consider when whole life insurance is the right choice.
1. You Want Permanent Life Insurance
When you get into the basics of life insurance, one of the fundamental differences between term and whole life insurance is that while term life is temporary, whole life is permanent.
When it comes to a financial strategy as important as life insurance, some people naturally prefer permanent to temporary.
While the amount of life insurance you’ll need at various stages of your life may rise and fall, the ultimate reality is that you will always need at least some life insurance coverage.
Whole life insurance guarantees that you’ll have at least that much.
The permanent/temporary dilemma between term and whole life can be worked out amicably.
You can purchase a whole life insurance policy to provide a minimum base, but add term insurance riders to provide extra coverage during times in your life when it’s needed.
For example, let’s say you purchase a whole life insurance policy with a $100,000 death benefit.
But you’re 30 years old, you have a mortgage to pay off and one or more small children. Clearly, you’ll need more coverage.
You can get it by adding a term rider to your whole life policy, which will increase the death benefit while the term is in force.
For example, if you add a $400,000 term rider to your $100,000 whole life policy, you’ll have $500,000 in coverage.
If you set the term rider for 20 years, that may cover the time when your mortgage is still outstanding, and your children are young and dependent.
Once your children have grown, and your mortgage is paid off, you can drop the term coverage and rely on the original whole life policy.
2. You’re Concerned About Becoming Uninsurable
Is there a history of chronic illness in your family line?
If so, this is one of the most compelling reasons to purchase a whole life insurance policy.
Not only will the policy remain in force permanently, but your premiums will never increase if you develop a significant health condition.
That may not be the case with term life insurance. For starters, a term policy premium will increase at the end of each term. For example, let’s say you have a 10-year level term policy, taken when you were 30.
When the term expires, you’ll be 40 years old. If the original term rolls over to another 10-year policy, the premium will be based on your age at 40, not 30.
But unless the policy contains a guaranteed renewability rider, your premium may be even higher if you’ve developed a chronic illness. There’s even a possibility the renewal will be declined.
Even if you do have a guaranteed renewability clause, you’ll pay a higher premium for the rider itself.
That may remove at least some of the pricing advantage of the term policy.
3. You Have a Permanent Dependent You Need to Provide For
Term life insurance is particularly effective when the need for coverage is predictable and limited.
Earlier, we gave the example of adding additional term coverage to a whole life policy, to provide for the payoff of your mortgage and taking care of your dependent children.
But if the need for coverage is permanent, whole life insurance may be necessary. A situation where this may come into play is where you have a dependent spouse.
You may also have a child with special needs, or have an elderly parent who needs to be taken care of.
Since that person’s reliance on your income is essentially open-ended, a whole life insurance policy would be the better strategy.
It would guarantee that there will always be at least some life insurance in place in case you die before the dependent.
4. You Want to Lock In Life Insurance Premiums Permanently
Inflation is a fact of modern life. Nearly every expense you can think of increases over time.
That includes health insurance, car insurance, property taxes, education, utilities – the list is endless.
For that reason, you may prefer to lock in certain expense levels where possible.
And it certainly is when it comes to whole life insurance.
Let’s say you take a whole life insurance policy at age 30 with a $100 monthly premium. You’ll be paying the same premium when you’re 40, 50, 60, and beyond.
And if you really prefer having at least some permanent life insurance, it’ll be comforting to know that the cost will be fixed, even and especially as your income grows.
In fact, while it’s often said to buy term and invest the difference, by locking in a whole life insurance premium early in life, you’ll be able to save a larger amount of your rising income in the future.
That’s looking at the investment aspect of life insurance from a completely different angle, but a valid one all the same. Speaking of investing…
5. You’re Not Very Good at Saving Money
While this may seem like the worst argument in favor of whole life insurance, it can also be the best.
The reality is that some people are much better at paying bills than they are at “paying themselves.”
Put another way, they find it difficult to include regular savings in their monthly budgets. In fact, according to BankRate, 65% of Americans have little or no savings at all.
If this describes you, a whole life insurance policy can offer a potential workaround.
While you’re paying your insurance premiums and keeping life insurance in force, the cash value in the policy will build.
Depending on how early in life you take the policy and how large the death benefit is, it’s possible to accumulate a six-figure cash value.
If you’re unable to save and invest money by any other means, whole life could end up being the best insurance you’ll have against being broke later in life.
And even if you are able to save and invest, the cash value from a whole life insurance policy can be an excellent supplement to other investments and retirement savings.
Final Thoughts on Whole Life Insurance
It generally is true that term life insurance will be the best strategy for most people.
It’s not just less expensive than whole life, but much less expensive. That will not only be easier on your budget but will also enable you to purchase a larger amount of life insurance than you can with whole life.
But if you fall into any one of the five categories described above, whole life insurance may better serve your needs.
And if you need more coverage than a whole life policy can provide, ask your broker about adding a term life insurance rider to the policy.
That will get you both the permanent insurance you want, with the amount of life insurance coverage you need.
And all at a price you can afford.