First, permanent life insurance is needed when you need it. Business owners, individuals and families with special circumstances (special needs children, large estates), and high earners may generally benefit from having permanent insurance.
You’ve perhaps been pitched on the benefits of whole life insurance; agents gush about how beneficial it is to use a whole life policy as a retirement savings vehicle. The main idea behind whole-life policies is that they force you to save money, which you will theoretically get back (along with even more money) later in life.
Forced savings is a common concept that makes sense in some situations. For example, think about the process of buying a house. Most people take out a mortgage to pay for a house, and they are forced to pay into the mortgage every month until it has been repaid. If they do not pay into the mortgage each month as agreed, they cannot continue to live in the house. At the end of the mortgage period (typically 30 years), buyers own the home and can hopefully resell it for more than they paid into it.
In this scenario, the concept of forced savings makes sense. If you want purchase a home with a mortgage, you have to pay into the home for a predetermined period of time before you can claim full ownership of it and decide whether you want to sell it or keep it as an asset.
Whole life insurance agents often claim that being forced to put money into a whole life policy is comparable to being forced to pay into a mortgage – with both options yielding highly desirable financial results down the road. But is this claim true for everyone? Before answering this question, let’s delve into how whole-life policies work.
How Whole Life Policies Work
It’s important to note that there are many whole-life policy variations on the market, so it is impossible to include them here. However, we can offer a simplified explanation of how whole-life policies generally work.
WL insurance is commonly referred to as “cash value life insurance,” a type of permanent insurance. It comes with a cash value component typically comprising a percentage of your premiums and a dividend from the life policy company’s annual profits. This money is set aside into a savings account attached to the policy. The cash value of the forced savings account grows over time.
Drawbacks of Whole Life Policies
One of the main selling points of WL policies is that they have a minimum guaranteed growth rate. Sounds great, right? Unfortunately, despite this benefit, WL policies can be financially detrimental to some people. Here are a few reasons why:
- Not nearly enough life pure insurance.
- A long-term commitment is required.
- You have a good chance of dropping your policy.
- WL policies are more expensive than term policies.
- Most money goes toward fees in the early years.
Whole-life policies require a long-term commitment to pay off in the retirement years. If you are not fully committed to paying into your WL policy until death, you are better off not getting one. Unfortunately, according to The White Coat Investor, approximately 80% of whole life insurance policies are surrendered eventually.
Many WL insurance policyholders surrender their policies because they are too expensive. Whole-life policies can cost up to four times more than term policies for comparable coverage. Those who choose to surrender their policies early do not get any financial benefit and are often left at a financial disadvantage because high fees and front-end sales commissions mark the policy’s early years. Coupled with policy surrender charges, these high costs can consume most or all of the WL policy’s cash value, leaving the policyholder with nothing.
Situations Where WL Insurance Might Make Sense
Purchasing a WL insurance policy as a retirement savings vehicle might make sense in limited circumstances. Individuals with very high incomes who have already maxed out their contributions to more stable retirement vehicles like 401(k)s may want to use a whole life insurance policy for the bond portion of their portfolios.
Still, trying to understand whether a whole life insurance policy is right for your investment needs? Call Approach Retirement Advisors to schedule a free introductory meeting and learn more about your retirement investing options.