Whole Life Insurance Pros and Cons

August 19, 2013

life insuranceThere’s an ongoing debate between whole life insurance and term life insurance. The pro-term life insurance opinions practically consider whole life to be a useless option. Is that really the case?

In truth, there are both pros and cons when it comes to whole life insurance. In general, it’s true that you’re better off to “buy term and investment difference,” but what if you don’t actually invest the difference? It opens up the possibility that whole life will be the right choice for you.

Arguments for Whole Life Insurance

While it may be true that term life insurance is the right choice for many people – or even for most – there are some compelling reasons why you might decide to go with whole life insurance instead.

Permanent Insurance

Whole life insurance is sometimes referred to as “permanent insurance.” Unlike term insurance, which has to be renewed at the end of each term, a whole life insurance policy remains in force for as long as you pay the premiums. That puts the existence of the policy completely under your control. Once you have the policy, the issuing company cannot revoke it except for fraud.

Locking in Your Premium

Term insurance is much less expensive than whole life, however both are priced based on your age. When you buy a whole life policy, you’ll get the rate that applies to your age at the time the policy is put in force. By contrast, a term life insurance policy will always be more expensive upon renewal because you will be older when it happens. The cheap policy that you bought when you were 25 can become extremely expensive when you renew it at age 50. It could even be more expensive than what you could’ve gotten your whole life policy for at age 25.

Forced Savings

If you are not a natural saver, then forced savings plans are an excellent strategy. Since whole life policies contain investment provisions where a portion of your premiums will be accumulated in an investment account, you’ll be saving money with each premium payment that you make. Term life insurance policies are pure life insurance and contain no investment provision.

The Potential to Have a “Paid Up” Policy

A benefit of a whole life insurance policy compared to term is that the cash accumulation in the account can become so large that you can apply it to paying future insurance premiums. That can enable you to use your cash value (investment provision) to pay off your premiums for the rest of your life. That can be a valuable option when you’re 65-years old, ready to retire, and looking for ways to cut living expenses.

Arguments Against Whole Life Insurance

Despite all of its obvious advantages, whole life insurance comes with at least an equal number of negatives.

High Cost

Term life insurance is not just less expensive than whole life – it’s much less expensive! Whole life can cost 10 times more than term for an equal amount of coverage. With such a big difference in premiums, term insurance could end up being the only life insurance that you can afford.

Changing Needs

Since whole life insurance policies are permanent in nature, it’s not as easy to increase your coverage as is with term policies. In fact, the typical way to increase the death benefit on a whole life insurance policy is by adding a term rider. But when you do that, you’re also adding all the aspects of term that you’re trying to avoid by taking a whole life policy in the first place.

It isn’t the Best Place to Invest Your Money

While whole life insurance does offer an investment provision, it is typically not a terribly effective vehicle. You can generally do better by investing your money in index-based mutual funds. If you have the ability to save and invest your own money – apart from having a forced savings plan – your investment returns over the long run are likely to be far better than anything you could get from your whole life plan.

Most of the Early Premiums Cover Fees

Yet another negative on the investment side with whole life is that the portion of your premiums that go into your investment account are usually very small the first few years, and even nonexistent in the first year. If for any reason you cancel your policy within the first two or three years, you will have paid an extremely high rate for what will be essentially term life insurance, but you will have very little investment accumulation to take out of the plan.

For the most part, whole life insurance works best for people who are either looking for permanent life insurance, perhaps out of fear over future insurability, or for people who have no capability to save and invest money otherwise. But there are people who are concerned with either or both, and if this describes you, whole life insurance is worth investigating.

What are your thoughts on term vs. whole life insurance? Leave a comment!


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Kevin Mercadante is professional personal finance blogger, and the owner of his own personal finance blog, OutOfYourRut.com. He has backgrounds in both accounting and the mortgage industry. He lives in Atlanta with his wife and two teenage kids and can be followed on Twitter at @OutOfYourRut.

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8 Responses to Whole Life Insurance Pros and Cons

  • leo san

    Buy term and invest the diffrence! Get a 35 year term and set up a mutual fund with the diffrence(whole life is 10x more expensive). You dont need life insurance for all your life. You just need it when you have family that are dependent on you(ex.children). After 35 years, your kids would have all grown up, and morgage should be payed up. Your Mutual Fund would have grown significantly and you’ll be retireing with 10x more money, you would would have with whole life. At this point all you’ll need if you want to continue with coverage would be final expenses.(funeral about 15k) Witch you realy wouldnt need to have because you’ll have more then enough money left over. In whole life for the first 5 years your just giving them your premiums and little to nothing is going into you savings. Ive never seen a client that is better off with whole life.

  • Jason

    In the interest of diversification, I use both types of policies: a large 30-year term for the bulk of coverage, along with a small whole life policy. The small whole life policy serves as protection against inflation that would erode the term policy’s value over 30 years, and beyond that I know there will always be enough left behind to cover funeral expenses, possible medical bills, etc. It’s also much more difficult to garnish life insurance in the event of a lawsuit, medical expenses, bankruptcy, etc. Even the best prepared savers can be wiped out by unforeseen/unlikely circumstances, so I think it’s wise to have some money protected this way as a hedge against the perfect storm.

    • Kevin Mercadante

      Not a bad strategy at all Jason. You can keep the whole life after the term expires and never be without coverage.

  • Robert Jacobs

    I use term because my return on investments in a whole policy are very poor. I can get plenty more coverage in term and invest the difference I would have spent on whole life except with a better return.

    • Kevin

      Hi Robert – Since you actualy are “investing the differenc” you’re using term insurance the right way and getting the best return. Well done!

    • Eduardo

      Whole life insurance is necessary if you want to have money at the end of your life if you live past your term insurance. If your wife outlives you and you have not saved you are leaving her with only one income at a time when she has little income.

  • AP @ Finance with Reason

    Part of the reason that whole life insurance is so much more expensive than term is that you have flat premiums for the entire life of the policy. Life insurance is much more expensive as you get older, but as the name would suggest, “whole life insurance” provides coverage even into those expensive years.

    You are essentially paying up now to have insurance in the future (although it is less insurance in the future because part of that will be cash value).

    If you don’t think you need to have life insurance at age 60 and beyond then whole life is probably not for you.

    • Kevin Mercadante

      The problem with whole life, fundamentally, is that the best time to buy it is when you are young, and the premiums are low. But that’s also the time when most people can least afford it.