No, it is not for idiots, however, most people who purchase whole life insurance probably did so because they were misinformed. They simply believed the hype and didn’t listen to the facts.
They were pitched with unrealistic expectations, sugar-coated, and even downright deceitful illustrations.
Anytime where is the service provider’s income, (like a life insurance agent) is based upon commissions, anything he or she says should be taken with a grain of salt. If anything sounds too good to be true, then it probably is.
Most people who purchase whole or permanent life insurance were probably better off with a simple term policy for insurance protection.
Permanent life insurance, just like term life, has its pros and cons. Anything you buy will have an opportunity cost.
For example, instead of paying $3,000 per year for life insurance, you could invest that money into the market. Over time, you’ll have a nice little nest egg, but if you die in the short term, your family will only have the little amount invested plus any growth if any, over that time.
So why do people say whole life insurance is for idiots? Well, here are some of the reasons why;
- “I’ll get all my money back once I am done paying” No, you will not. Once you are done paying your premiums, you do not get anything back. You have access to the cash inside the life insurance policy if you need it. However, you only have access to the cash as a loan against the policy. So you have to pay interest to the life insurance company to borrow your own money. Any funds not paid back will decrease the death benefit. The policy loan includes any accrued interest.
- “I will only have to pay for 10 or 15 years, then the policy will pay for itself” Well, if you are lucky, then yes. However, most people pay for permanent policies until the year they pass away. Another way unscrupulous life insurance agents will get you to buy an expensive whole-life policy is to tell you that you only have to pay for 10 or 15 years, and then you’ll basically have a guaranteed policy for the rest of your life.
Whole life insurance and similar cash accumulation value policies are invested either in the market or typically within the life insurance company’s own stock. That stock pays dividends that will go to pay the price of the annual premium. If the stock or policy doesn’t perform well enough to pay the following year’s premium, you’ll have to keep paying the policy premium. It can take many years before enough dividends are created to pay the full policy premium.
There is such a thing as limited pay policies, but unless stipulated so, there is no guarantee that you will not have to keep paying.
- “Whole Life Insurance is a great investment and will fund my retirement” Whole life insurance is not a great investment, and will not fund your retirement. You can take this to the bank. Traditional investments are the best way, such as 401K, IRAs, and other investment accounts, or even alternative investments like real estate.
When you pay the premium, part of the money goes to the policy overhead cost and to the insurance company, some goes to commissions, and then the remainder goes into the cash value. That remainder and subsequent payments will accumulate into the cash value that will pay dividends. Due to the nature of high costs associated with whole life, and average dividends at best, whole life cannot keep up with traditional investments if invested properly or under the watchful eye of a financial advisor. - There are many other reasons why people purchase whole life insurance under false pretenses such as college savings, estate planning, tax savings, creditor protection, and the list goes on. While there is some truth to these benefits, whole life insurance does not fully accomplish what is being told by the industry and its agents.
Instead of going thru every single reason why people purchase their whole life when they should not have, the top 3 reasons listed above should prove the case.
There is no one financial product that can be an all-in-one potion for everyone’s financial needs.
So when is the right case for someone to purchase whole life insurance?
The case for whole life insurance is far and few. Here are two that I believe is why people purchase their whole life.
People do not like the possibility of their term insurance ending in 20 or 30 years and feel they may not have saved enough over the years to self-insure themselves via their own assets, so they may keep a whole life insurance policy for peace of mind. A basic Universal Life insurance policy would suffice here. Universal life insurance is a permanent policy without the cash value, so the premium is a little bit cheaper.
There is also something called Index or Variable Universal life insurance. See the different kinds of insurance here: https://sentigentfinancial.com/insurance/
Policies with cash value can be later converted to annuities. This is rarely spoken about, but annuities are a retirement vehicle that is tax-deferred and can provide income streams, and other living benefits. They can even be used to invest in market securities, which are called Index or Variable Annuities. Not all policies are allowed to be converted, so best to speak with an insurance specialist.
So if you purchased a whole life policy and no longer need it, you can do what is called a policy review and replacement. You can then find a more suitable policy for your needs.
