Why Is Whole Life Insurance Bad?
If you have people in your life who depend on you financially, then having a life insurance policy is a must. However, not all life insurance policies are created equal. Whole life insurance might not be the best choice for most people. Although it can be a reasonable choice for some, signing up for whole life insurance is a move you’re more likely to regret.
Differences between Term Life and Whole Life Insurance Policies
Term life insurance covers you for a specific period, typically 30 years. During that time, you pay premiums monthly, quarterly, or annually, and in exchange, your heirs are guaranteed a predetermined death benefit should you pass away. Whole life insurance, on the other hand, covers you indefinitely as long as you keep paying your premiums. A portion of each premium goes toward your policy’s cash value, which accumulates over time. You can borrow against it, withdraw funds from it, or surrender your policy and collect the cash value minus the policy surrender fee.
Here is a table that compares the two types of life insurance policies:
| Term Life Insurance | Whole Life Insurance |
|---|---|
| Covers you for a specific period of time | Covers you indefinitely as long as you keep paying premiums |
| Lower monthly premiums | Higher monthly premiums |
| No cash value | Has a cash value |
| No investment component | Has an investment component |
| Does not accumulate value | Accumulates value over time |
| Typically does not require a medical exam | May require a medical exam |
Why Whole Life Insurance May Not Be the Best Choice
Whole life insurance policies are more expensive than term life insurance policies. For any given death benefit, your monthly premium for a whole life policy will be much higher than for a term life policy. Whole life insurance can cost six to 10 times more than a comparable term policy. This means that you’re more likely to be unable to afford your premiums at some point down the line, leaving your loved ones vulnerable.
While proponents of whole life insurance will tell you that it’s an investment, the cash value of your policy is guaranteed a certain level of growth, and you’ll benefit from the tax-deferred nature of that growth; there are other investment options that tend to offer much higher rates of return over time than whole life policies.
Lastly, life insurance is intended to replace the financial support you provide to your loved ones in the event that you pass away. By the time you’re in your mid-60s or older, you’re probably headed for retirement, or retired already. You don’t need life insurance to replace income you’re no longer bringing in — and if you’ve invested properly, your financial situation should be stable regardless.
Overall, unless you’re really doing well financially, you’re at risk of being forced by circumstance to drop your coverage at some point when you can’t afford it, thus negating any benefit that the policy would have offered you or your loved ones. In conclusion, term life insurance offers you much more financial leeway, making it a better option for most people.
