People discussing whole life insurance
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Why Whole Life Insurance Policy Might Not Be Worth It for Most People

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Oct. 15 2021, Published 2:09 p.m. ET

Given a plethora of life insurance policies available in the market, people usually get confused about what to choose depending on their requirements. Choosing a plan that fits an individual’s goals is vital to mitigating the risk that arises from the sudden death of an earning member of a family. The whole life insurance policy provides the benefits like guaranteed death benefits. Is whole life insurance worth it based on its costs and benefits?

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Whole life insurance is a type of permanent life insurance that provides death benefit coverage for the life of the insured. Other types of permanent life insurance policies are universal life, survivorship life, and variable life. In addition to paying the death benefit, whole life insurance also contains an investment component known as “cash value.”

Cash value part of whole life insurance

Part of the premium paid towards the policy keeps on accumulating in a cash-value account. This keeps growing over time and can be accessed either through a withdrawal or a loan. However, withdrawals and unpaid policy loans reduce the cash value of the policy.

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The cash accumulation component is the major differentiator between whole life and term life insurance. The interest accumulates in whole life policy on a tax-deferred basis. The interest you are paid isn't taxed as long as the money stays in the account. You’ll only need to pay taxes if you withdraw more cash than you paid in.

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It basically provides three kinds of guarantees:

  • A guaranteed minimum rate of return on the cash value
  • The promise that your premium payments won’t go up
  • A guaranteed death benefit that won’t go down

Major concern with whole life insurance policies

One of the major concerns people have with the whole life insurance policy is that the return on these investments tends to be lower and the fees are higher than with other investment options. These policies are usually ten times the cost of term life insurance. Forbes has calculated a $500,000 40-year term life and $500,000 whole life policy (from different agencies) would cost about $700 and $4,060 per year, respectively.

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The price differential is huge at 5.8 times. While this isn't an apples-to-apples comparison due to the different nature of policies, it still proves a point that whole life insurance policies are expensive.

For most policies, they only pay out the death benefit to your beneficiaries, irrespective of the cash value you have accumulated. While there are policies where you can buy the rider that provides beneficiaries with a death benefit and accumulated cash value, the premiums on such policies are also much higher.

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Is whole insurance policy worth it?

While experts have varying views about whether or not you should go for whole life insurance policies, most of them agree that there are better options available in the market.

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That isn't to say that whole life insurance policies don’t have any benefits. One of the major benefits is that the cash accounts in this policy grow in a tax-deferred way. Therefore, funds can grow quicker.

However, even after considering its benefits, whole life insurance might not be worth it for a large number of people needing insurance. Its high premiums, high investment costs, relative inflexibility, and better alternative investment and life insurance options available makes this policy not so attractive.

Who should go for whole life insurance?

The people who have maxed out their 401(k) plans, IRA, and other IRA options and have high income can go for whole life insurance policies. Another reason people can consider this policy is if they want to fund a trust that will support children after the death of the insured. People who have estates larger than their current tax exemption can also consider this option. Whole life insurance can help heirs pay estate taxes when the insured person passes away.

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