Whole Life Insurance. Don’t Do It!

Why would I even consider owning such a policy? Ok, first let’s start by saying that there are no “bad” policies per se’, just policies used for the wrong goals and/or for the wrong individual’s needs. The self-help financial gurus may question the logic of using it, but that just doesn’t play out. We can all agree that everyone (with a few notable exceptions) needs life insurance to protect their families from financial loss due to the untimely death of a loved one. Where we may differ is choosing the right instrument for the job, being in that they (gurus) will tell you Term Life insurance is the only way to go for everyone.

Term life insurance can certainly protect…for a certain amount of time, certain amount of money/ premium,and for a certain set of people a valuable tool. While giving you the peace of mind, it does not offer any cash value other than your designated benefit in event of  loss. Let’s come back to this.

Permanent life insurance…Whole Life and Universal Life…offers the same protection with the addition of a lifetime of level premiums, the building of cash values, and can have an option of dividends being paid back into the accounts that are building cash value, thereby enhancing your cash value via compounding interest (the guaranteed rate the insurance company builds into your account). The focus here will be on Whole Life policies.

How is it different? Some people often refer to Term Life as “renting” your policy/ benefit and Whole Life as to “owning” it. Owing to the build-up of cash value in your policy’s account and the guarantees involved, the premiums on Whole Life are quite different, higher in fact. Bear in mind, part of your premium goes towards cost of insurance while the larger portion goes to your account. This is where the gurus will tell you to buy Term Life and invest the difference in cost, into mutual funds, etc. This is also where it goes off the rails…insurance is not an investment, it is a pure asset.

As an asset, Whole Life can:

  • offer the benefits of Term Life
  • build a supply of wealth, via compounding interest
  • offer ease of access (liquidity) to cash via using against your accrued cash value
  • built in guarantees

All in all, depending on your situation, Permanent Life/ Cash Value insurance is perhaps one of the best anchors to have in your asset portfolio. I believe in these policies, I do in fact utilize them personally, and would not hesitate to recommend them for you given the right set of circumstances.

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