I'm Not Sold on Whole Life - and You Shouldn't Be Either

paper family in a businessman's ...
Many financial advisers love whole life insurance, and I'd love to offer a conservative investment to my clients that pays a safe return, but the numbers just don't jibe.

I have a $2.5 million, 30-year term policy on myself, and I pay $1,790 per year. I priced a $250,000 whole life policy for a 30-year-old male, and the cost was $3,440 per year. For a tenth of the coverage, the annual premium almost doubles.

I can already hear whole life insurance zealots foaming at the mouth.

I can already hear whole life insurance zealots foaming at the mouth, waiting to shout things like, "whole life insurance offers great returns," and "it's much safer than the stock market."

And I've heard it all before, but every scenario I have ever encountered where an individual has been paying on a whole life policy for an extended number of years, what they were told they would have accumulated by that point has never been even close to what they actually have.

When I wrote about that elsewhere, the article generated this comment: "Whole life policies don't really start kicking in until retirement. Your clients that have those policies have usually just gotten past the insurance cost and won't see their cash value compound rapidly until they're 35 years in ... unless the policy was designed to do so."

Did you catch that? This whole life enthusiast wants me to wait 35 years until I start seeing my cash value accrue. No thanks.

Still wanting to believe that whole life insurance can make sense, I polled several other certified financial planners. Here's what they had to say.

The Difference Between Term and Whole Life

At its core, life insurance is about replacing a person's income in case of their untimely death. If you're only interested in income replacement, then term life insurance will generally suffice: You are insured for a certain period, generally 10 to 30 years. Whole life insurance (also known as permanent or universal life insurance) doesn't expire like term insurance does, unless you let your policy lapse.

Whole life insurance is a great deal more expensive than term insurance. For that reason alone, individuals who earn less than $200,000 or so per year, according to certified financial planner Joshua Thompson, should stick to low-cost term life.

Benefits of Whole Life Insurance

In addition to the fact that your death benefits from whole life insurance never expire -- meaning your family will see the insurance pay out whether you pass away young or live to a ripe old age -- there are some good reasons for choosing whole life over term.

  • Age and price. If you go for a term policy when you are in your 30s, the price difference between it and a whole policy will be enormous. However, as you age, term life insurance becomes more expensive. Eventually, you may find that you are uninsurable with a term policy because of age or health.
  • Potential cash value benefits. Basically, as you pay premiums for whole life, your policy's cash value grows. Often, whole life policies will present a minimum cash surrender value, guaranteeing that your policy will grow to a certain level in a certain number of years -- although the cash value amount will be lower than the face value of the policy. For instance, according to Kiplinger, "It's entirely possible that a $250,000 policy bought at age 35 could accumulate a cash surrender value of $100,000 by the time you reach age 65." "Could" is the key word here. The cash value is tax-sheltered, meaning neither the interest nor the earnings are taxable. When you turn in your policy, you can collect whatever the cash value tax-free, provided that the cash value does not exceed what you have paid in premiums. Once you reach a certain level of cash value, the investment will be earning dividends sufficient to pay the policy's premiums -- if you chose to use them that way -- making the policy self-sustaining.
  • A source of money. You can borrow against your cash value while leaving the policy in place. If you do so, you are not required to pay back the loan, although you will owe interest on it -- and your beneficiaries will see the amount of interest and debt outstanding deducted from the death benefits.
The Rich Man's Roth

Whole life insurance is sometimes referred to as the rich man's Roth. That's because once you reach a certain income level (over $191,000 for married couples and over $129,000 for individuals), you can no longer contribute to a Roth IRA, which means you lose out on the tax benefits. But these individuals can still put after-tax money into tax-sheltered whole life insurance.

Whole life will allow high-earners to take advantage of tax-free growth and potentially add a tax-free source of retirement income if they decide to cash out or take a loan from the policy.

Alternatively, whole life insurance can allow high-earners to create a safe legacy for their heirs while being more aggressive with other aspects of their portfolios. Even if your investments are in a downturn at the time of your death, your family will still receive the life insurance payout. This gives you more freedom to invest aggressively elsewhere.

8 Variables for Buying Whole Life Insurance

Joshua Thompson, a certified financial planner, has identified eight variables for determining if whole life is a good addition to a given person's portfolio:

  1. Are you contributing the maximum to your qualified retirement plan -- e.g., 401(k)?
  2. Are you contributing the maximum to an IRA? Can that IRA be converted to a Roth?
  3. Will you truly benefit from tax-free growth? That is, are you in the 28 percent or higher tax bracket?
  4. Will you potentially be in the same or higher tax bracket in retirement?
  5. What type of liability do you have due to your work or lifestyle? Does your state of residence protect the cash value of your life insurance and annuities?
  6. How much are you investing into a normal non-qualified investment account?
  7. Would you be better served with an annuity?
  8. Do you have a plan for estate taxes?
You should also consider just how long you intend to hold the policy. While whole life insurance policies are theoretically in place for life, policyholders who hope to use the cash value during retirement may want to reconsider if their retirement is less than 35 years away. It will generally take that long before the cash value of the policy begins compounding rapidly.

Clearly, whole life insurance is not a product that every person will benefit from, and only under very specific circumstances cab even high earners expect to truly profit from it.

Buyer Beware

There is a general consensus among financial gurus like Dave Ramsey that whole life insurance is evil. And to be honest, many of the issues that Ramsey and others point are true. In particular, commissions for whole life policies can start at 55 percent of the first year's premiums and can be as high as 100 percent.

That means that insurance agents can be very motivated to sell you a policy. And since the insurance industry is not required to follow fiduciary standards (which would require agents to put your best interests ahead of theirs), there is a huge potential for conflict of interest.

The other aspect of whole life insurance that makes personal finance experts twitchy is that illustrations of potential cash value offered by agents are so often unrealistic. Signing on the dotted line for a whole life policy that is supposed to make you rich in retirement -- especially when you aren't already -- is a terrible idea. You'll simply be sending good money into the ether and not necessarily seeing the return you could get with other investments.

Insurance Is Not an Investment

Insurance is not an investment. As certified financial planner Susan Quigley puts it, "Insurance is a transference of risk, spread out over many people in a similar category to reduce everyone's risk."

This is why whole life insurance generally has a place only in the portfolios of high-earners who have maxed out their other investment opportunities. According to financial adviser Bill Dix, "whole life insurance is the conservative part of a client's portfolio." If you're putting money into a whole life policy in the hope that it will mean smooth sailing in your retirement years, then you are wasting your money.

What Average Earners Should Do

Many financial experts recommend that people who do not enjoy a Scrooge McDuck level of wealth buy term insurance and invest the difference between the term premiums and the whole life premiums. However, investing the difference is like not eating the Rocky Road ice cream in the freezer -- it's a rare bird who can actually do that.

Otherwise, it's best to uncouple your life insurance needs from your investment needs. You need life insurance presumably as a hedge against lost income now, and as a legacy later after you have retired. Your investment needs are about ensuring a comfortable retirement. Even though it is all your money, it will make more sense to earmark money for your life insurance as separate from the money for your investments.

Most earners should purchase a sufficient term life policy and a modest permanent life insurance policy. That means your family will be economically taken care of if you die during your earning years, and you will have something in place for your heirs if you make it into your 90s -- when no term life insurance agent would touch you with a 10-foot pole.

"Whole life is dangerous because it is so expensive," says Neal Frankle, a certified financial planner and DailyFinance contributor. "It soaks up so much of your cash. You may not have enough money to buy all the coverage you really need. As a result, many people go terribly underinsured, and it's the family that pays the price."

The Bottom Line

There is a very good reason why talking about life insurance at a cocktail party will mean that you are not invited back. Not only do we not enjoy thinking about our own mortality, but the products can be confusing, the agents can be pushy, and even the experts can disagree on the right course of action.

This is why it's so important to partner with a trusted financial advisor who can help steer you to the products that will best serve your needs. Your family will be glad that you did.

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Did anyone forget to mention that many whole life policy only covers up until 100 years old? After which you get no benefits? Whole life insurance isn't truly "whole life."

September 09 2015 at 3:01 AM Report abuse rate up rate down Reply
1 reply to Danny's comment

Seriously? whole life means you stop paying at 100 because its endowed. The guarantees that the insurance company gives states that at a bare minimum your cash value will equal the death benefit at age 100. You don't loose anything. If a company pays dividends, the death benefit at age 100 is usually 3-4-5-6 times larger than when the policy was first issued. Your statement is thus invalid. Term insurance on the other hand has zero value after the term...

December 04 2015 at 4:17 PM Report abuse rate up rate down Reply
Brandi Jo Newman

This is horrible, wealth eroding advice. Whole life insurance is the only financial instrument that allows for maximum retirement income guaranteed for life.

With whole life insurance and retirement assets, you can increase your retirement income by at least 30%.

It's not a choose of either/or - you get both when you understand macroeconomic principles of retirement.

March 22 2015 at 2:38 PM Report abuse rate up rate down Reply
Thomas Landy


October 16 2014 at 10:18 PM Report abuse rate up rate down Reply

A young person should be taking advantage of the costs associated with whole life because term insurance disappears in the end. That means all those dollars are gone, the purchasing power of those dollars are gone, the interest on those dollars are gone and the time value of money is gone. With participating whole life you lock those dollars in which keeps them in your coffers for as long as the policy is in force. The cash value is an added bonus that accrues but you're first and foremost buying life insurance protection. It's not an investment but it is a hedge against the rest of your portfolio, it should not be used in lieu of investments but as a complement to them! What par whole life does is give a family a guaranteed legacy value to pass on so their other retirement assets can be spent down instead of living off the interest, this means they are able to live off more in retirement then would have been possible otherwise. It also protects them from taxation, creditor suits and divorce proceedings because it is a shielded asset. It can also give them access to cash loans without risk of shock to their credit score and can be used as collateral against a loan if necessary. There is a lot that participating whole life can do for people but in and of itself it is not an investment. My family has been in this industry for 30 years and I have been doing it for five. When I was young my father bought a 250k WL policy on me. It now has over 90k of cash value and 650k of death benefit. I have also bought 3 new guaranteed offer policies without new underwriting because he put a GIO rider on it. Now my coverage is over $1m DB for my family and I am paying about $300/month. That is the Power of a proper whole life contract, guarantees, strong returns, guaranteed death benefit for as long as the policy is in force and flexibility that almost no other product can offer. It doesn't suit everybody but should be considered by everybody. Also, only policies sold from Mutually Participating Life insurance companies should ever be considered because they work for policyholders and not stockholders?

September 24 2014 at 4:50 PM Report abuse rate up rate down Reply

My wife had a term life policy, and when that term was up, the price quadrupled to keep it--term life is not my advice!

July 07 2014 at 1:33 AM Report abuse +1 rate up rate down Reply

I have to disagree with Mr. Rose regarding his thinking on Whole Life. I purchased a $100,000 Whole Life policy 3/17/1978 at the age of 41. I have paid an annual premium of $2,423 for 36 years. $2,423 X 36 yrs. = $87,228 (My cash outlay to date) As of the recent anniversary date of the policy, namely 3/18/2014, my total cash value is $306,151. If I cashed this policy in now, my net gain would be $218,923. $306,151-$87,228=$218,923. How do I arrive at these figures? When purchasing the policy, you have a choice of having the annual dividend purchase additional paid up insurance (PUA), or using your annual dividend to reduce your premium, or leaving the annual dividend accumulate and earn interest on the dollar amount accumulated. Providing you buy from a company that pays dividends. In my case, I chose to use the annual dividend to purchase Additional Paid Up Insurance. The PUA generates a cash value in addition to the cash value of the basic policy. As of this last anniversary date, the base cash value of the policy was $66,971, wheras the cash value generated from the Additional Paid Up insurance was $239,181. Add the two together and you come up with $306,151. Now I can collect the PUA's of $239,181 immediately and still have a death benefit of $100,000. $239,181 to subsidize my retirement and $100,000 to leave to my heirs. My cash value increase just this past year was $14,435. This is one of the best investments I have and don't have the risk I have with stocks. I would like to have Mr. Jones explain to me how I could have a guaranteed better investment. and by the way, this policy was issued by State Farm Life Insurance Company..

July 07 2014 at 12:10 AM Report abuse +1 rate up rate down Reply
1 reply to JIM's comment
Rusty Scott

According to my calculator, you'd have 1.1m investing that same amount into the sp500

November 07 2014 at 2:56 PM Report abuse rate up rate down Reply
1 reply to Rusty Scott's comment

Rusty, you need to remember that when Jim began this policy at $100,000 he bought it for the value of life insurance as well... if Jim were to pass in the first few years his family would have had a significant "return" on his investment. In your scenario, if Jim just invested the money, how much would his family had if he had a sudden death? $5,000? 10,000? who knows? You buy whole life insurance to cover risk, but also have money accumulate over decades at a reasonable rate. And yes like others have said, go with a reputable mutual company that has been paying dividends for decades.

December 04 2015 at 4:22 PM Report abuse rate up rate down

I don't really know but I think all insurance companies has a secret way of controlling cash value because it sometimes gets confusing because they tell you that you have a cash value policy but if you want to withdraw the cash value then you may have to pay it back BUT when I take a close look at how a young person can buy a $50,000 WL policy for $25 per month and this young person pass away after having the policy for 12 months which cost only $300 but the insurance company has to pay out $50,000 so I think this is how they make their money back, off cash value so insurance can be a win or lose situation. When I took out a WL policy on myself and my granddaughter I didn't give a hoop about the cash value on my policy
because at my age I can never pay into this policy for what it would cost to bury me. My granddaughter's policy is paid up in ten years so once she turn 23 years old I will never have to pay another dime. When she get older she can add more coverage without having to take a physical. If she create bad credit and can't get a loan then she can borrow from her cash value without a problem BUT she may have to pay it back. I didn't take out this policy for her sake, I took out this policy for my sake so she won't come to me for a loan.

July 06 2014 at 11:22 AM Report abuse +2 rate up rate down Reply

There are some companies that offer whole life, universal life, or other cash value policies that are not very good deals, BUT--- there are plenty of others that do a very GOOD job, and there are many well-trained agents who are also quite conscientious about recommending to clients ONLY what they would choose for themselves if their fact situations, goals, and needs were the same as the cllient's. That may not always have been the rule of law, and there are some agents who do not have good ethics, but everyone in the agency where I was trained subscribed to that ideal, which is also the credo of the Chartered Life Underwriter's society. To improve your chances of working with such an agent and also getting a high-value product that will far outperform that 35 year garbage in the article, get in touch with an agent with Mass Mutual Life or Northwestern Mutual Life, two of the finest companies, with many well-trained ethical agents. Might there be a few who do not match that description? Yes, but the chances are much better that you will get the right recommendations for your needs and ability to pay with those two companies. It may be for you to buy all term, all permanent, or some combination of the two. But don't listen to the extremists who carry on about only buying term and investing the difference. Life spans are pretty long now, and I have never met a beneficiary at any age who thought he or she had been left with too much insurance, so it is not actually very realistic to think that one's need for insurance evaporates at any point, unless all the beneficiaries have pre-deceased the insured. And term will not be affordable for most people in their later years, even if it is still available. It typically expires before the insured does, and all those premiums are paid with no return on the dollar at all. I have only paid two death claims on term, both to men who died early, one from a heart attack, the other from cancer. All others were from whole life policies. And if the dividend option is set up to be "Paid-up Additions," both the cash value and the death benefit will grow far more over time than with any other choice. One of my family members died last year, and her benefits far exceeded what had been originally projected, which was pretty impressive itself. Of course, the younger one gets into whole life policies, the cheaper the premium and the higher the cash values will grow. Any doubts? Call a good MML or NML agent and ask for some more specific information on yourself or your offspring.

July 05 2014 at 10:44 PM Report abuse +2 rate up rate down Reply
Saint Michael

As with anything else, shop around. Consider my example:

My $250,000 whole life policy costs $626.20 per month for 60 months...essentially the cost and terms of a new car loan. At any time, I can cancel the policy and the company will refund the GREATER of the premiums paid or cash value. Within two years, the cash value exceeded the premiums paid. The only risk to me was inflation, which the government says is "low," and that the company would go bankrupt, which no major life insurer has in nearly 100 years. In addition, the death benefit has risen and will continue to rise.

The key to whole life is getting the payment period down so something manageable, not the 35 year crap that the author wrote about, and being able to access your money lie I can.

July 05 2014 at 9:29 PM Report abuse -1 rate up rate down Reply
1 reply to Saint Michael's comment
Saint Michael

*like I can.

July 05 2014 at 9:30 PM Report abuse -1 rate up rate down Reply

Many years ago I read a book by :
Arthur Milton
Title : How Your Life Insurance Policies Rob You
Every American who cares about their financal future should read it.
I worked with a company which only sold term insurance.
By term, and invest the difference is the only way to go.

July 05 2014 at 6:15 PM Report abuse rate up rate down Reply
1 reply to maggiemoe1950's comment

Maggie... so let me ask you a question. Do you own term insurance and do you invest the difference? Do you keep investing in both up markets and down markets? Do you diversify as much as insurance companies? I sell insurance and I will tell you that those that own whole life policies typically have other forms of savings and significantly higher net worths then those who only have term insurance---no one ever buys term and actually invests the difference.

December 04 2015 at 4:27 PM Report abuse rate up rate down Reply