As the US tax code has always bestowed favorable status on a whole life insurance policy, many agents are quick to tout the “upside” of paying expensive whole life insurance premiums vs. what’s required for a 20 or 30 year term or guaranteed universal life.
Whole Life Pros
- tax deferred growth & possible tax free distributions
- guaranteed premiums and the “forced savings”
However, like all financial products, there’s major downsides too which are usually glossed over in the sales presentation.
Whole Life Cons
- very significant penalties for early cancellation
- low contractually guaranteed returns on premium outlay
Most agents sell off “projected returns” touting historically favorable dividends or interest rates which hark back to the pre “great recession” days when insurers (and consumers) could generate meaningful positive returns on conservative, no risk investments.
Savvy consumers always weigh the pros and cons of any purchase and make decisions that best align with their objectives and circumstances. That said, it’s difficult for many consumers, particularly in the “middle income” market to sort through the clutter and resist the rosy sales presentation. Some agents have perfected their pitch to suggest the recommended whole life policy can simultaneously provide adequate death benefits, adequate emergency funds, adequate retirement income and solve world hunger (okay, maybe that last one is a stretch … but you get the point). The good news for consumers is trends seem to be changing somewhat. Some agents are now actually having a “Whole Life Insurance Rebellion” about the pitfalls of whole life insurance. This is a result of a push back / lack of consumer confidence in the product.
When Not To Buy Whole Life Insurance
Whole life is a product that should not be purchased unless one is absolutely convinced their insurance need is permanent, regardless of the age they pass on. Even if that’s established, smart consumers will compare /contrast the whole life strategy with another which has a death benefit guaranteed for life – Universal Life programmed at a premium level which provides a “no lapse” guaranteed to age 121, kind of a “term for life” scenario. Most importantly, whole life should never be purchased unless the premium is comfortably affordable – and this is the biggest problem in the middle income market. Consumers in this market can rarely get the robust death benefits they need to pay off mortgages/provide income replacement/ provide for children’s higher education – all necessary in event of premature death – with a whole life product chassis . Unfortunately, many who buy into the sales pitch realize this within just a few years of policy issue and cancel the policy, suffering a huge surrender charge that consumes most all of the premium outlay. Consumers in this market are far better off purchasing adequate death benefits via term insurance with a “locked” rate for 20 years or 30 years … and investing their discretionary dollars in traditional investments with low fees through discount brokers, no load index mutual funds or “robo advisors”. One can achieve the same “forced savings” element with these investment products too by signing up on a monthly bank draft basis – but can turn off the contributions at any time when /if ”life happens” without incurring any penalties. Fact is, there is a place for whole life insurance but it’s in the upper income or estate planning market. Unfortunately, there’s not enough of the 1, 5 or 10 “per centers” out there to satisfy the sales quotas of insurance agents and the profit targets of US life insurers – so the “misrepresentation” continues.
Incidentally, insurers could solve part of this problem by spreading the commission paid for whole life sales over a longer time period, rather than fronting the vast majority of it out in the first year (hint: why does the surrender charge have to be so high?? ) – but that’s a topic for another article.
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