I’m a husband. I’m a dad. My family depends on my income and my help around the house – whether it’s repairing the roof, putting together a new “big girl” bed, or even something as simple as changing yet another diaper…My family needs me. And, if I suddenly couldn’t do these things, they’d desperately need an income to replace me. This is where life insurance comes in. And, after looking at and studying many different options, I’ve come to the conclusion that whole life insurance sucks and pretty much no one should consider wasting their money on it.
8 Reasons Whole Life Insurance Sucks
Are you in the market for life insurance? Do you have a friend that’s trying to sell you on something and you’re just not quite sure about it? If you think their solution for you might be whole life insurance, run far and run fast my friend! Whole life insurance sucks. And here’s the back-up for my strong statement (and at the end of this post I’ll tell you what you should spend your money on instead).
1) The Cost is Outrageous
Term insurance covers you for a certain time-frame – typically for 10, 20, or 30 years. Whole life is set up to insure your life for a much longer time frame – typically until you officially kick the bucket. For the most part, this is why whole life is so much more expensive than term. The only thing is, it’s a LOT more expensive than term.
Check out the two quotes I got below.
This one is for term insurance over the next 20 years. The face value on the policy is $500,000 (ie. what my beneficiary gets if I die).
The cost? $20.67 per month.
And this quote is for whole life insurance. It would cover me until I’m 110 years old, and again, the face value on this policy is $500,000.
The cost? $205.00 per month. Ouch! That’s 10 times more than the term life insurance!
I’m 33 years old right now. What if I died at 52 years old?
With term insurance…
- I will have paid in $4,960.80, and
- My wife would get $500,000 from this death benefit
With whole life insurance…
- I will have paid in $49,200, and
- My wife would get $500,000 from this death benefit
I don’t know about you, but I’d rather pay the $5,000 instead of the $50,000…
(for those of you that are screaming at your computer screens or smartphones, “But Derek, what if you die at 65??!! You get nothing with the term insurance!” Yup, I hear ya. Got it covered. And, if you simply can’t wait for it, fast-forward to #4. ;))
2) The Returns on the Investments Suck
That crafty insurance salesman is sitting across the table from you and senses your hesitation about the high monthly cost of whole life insurance. That’s when he grabs his handy-dandy chart — the one that shows the cash value plan and the 6% annual growth on your money.
Hmmm, seems pretty good, right? Not only is your $200 insuring your life for your family, but it also builds up a cash savings that will grow over time. Pretty sweet.
HEY! Snap out of it!! Whole life insurance sucks, remember?
That 6% is the projected rate of return on your investments. In reality, the returns will only max out at the guarantee – typically 3.5% or less. And then, as if that wasn’t painful enough, they’ll hit you with management and processing fees (you know, those fees that were mentioned in fine print on page 26 of your documents that you’ll never get around to reading)… In the end, you typically earn somewhere around 1%-2% on your investment. I don’t know about you, but I hardly consider that an investment.
3) The Insurance Company Keeps the Cash Value When You Die
Alright, so the investment portion of your whole life insurance plan doesn’t earn much. You might be okay with that since it’ll still build up cash without any effort from you. But what if I told you that when you die, they keep your money?
I’m dead serious. (I never joke about money ;))
- You could pay into your cash value plan for decades,
- It could build up to $20,000 or so, but
- When you die, the only money they’ll give you is the $500,000 for the face value of your policy.
The $20,000 that you worked so hard to save up…that just floats into the ether. Actually, that’s incorrect – let’s just be real here… It goes into the life insurance company’s pockets. Whole life insurance sucks… It really does. And guess what? There are still four more reasons that make it even suckier…!!
Have you ever asked yourself the question,
“What is the purpose of insurance?”
If not, I encourage you to ask yourself now…especially when it comes to life insurance.
In my opinion, people should purchase insurance to cover themselves from an event that they cannot recover from on their own.
- Medical insurance (cancer…that can take you down both physically and leave you desperately broke…)
- Home insurance (replacing a house is fricken expensive)
- And in most cases, life insurance…but not always
What if you were 55 years old, all the kids were grown up and gone, and you were worth $3 million??
Would you need life insurance?
Or do you think your spouse could suffer through on the millions of dollars that are in the bank? I’m thinking you could do without the $500,000 policy at this point…
And that’s exactly why I promote term life insurance.
Why would you buy whole life insurance to cover yourself for life if you plan on doing well financially anyway? Heck, if you can afford the $200 a month, then you can probably afford to put a bunch of money into your 401k as well!
Actually, let’s go down that road for a second. What if you invested $200 a month from age 33 to age 73? What would it be worth?
And guess what? You don’t even have to die to get the money! It’s time to think about insuring only the portion of your life that’s necessary – typically from age 30 to age 55 (or whenever your kids finally leave the nest). Beyond that, you should be wealthy enough to do without. That’s why whole life insurance sucks and why I recommend term life insurance every single time.
5) Your Cash Savings Is Incredibly Illiquid
Getting back to that cash savings option again…
Sure, it’s cool to point to a chunk of money in your whole life insurance plan, but it’s kind of like putting $20,000 of cash into an impenetrable glass box – you can see it whenever you want…you just can’t ever spend it.
Okay, so I’m being a little bit harsh, but it’s not too far from the truth.
There are actually only two ways to get your cash savings out:
- You can take out a loan on the money (but for most plans you have to pay interest….on your own money that’s hardly earning any interest anyway… (eye roll), or
- You can cancel (“surrender”) the policy and forego the face value – then they’ll mail you whatever’s left of your cash value after all the penalties and fees…
Sound pretty crappy? That’s because it is. Whole life insurance sucks. There’s no nicer way to say it than that. And for all you whole life insurance salesmen out there…I’m not sorry.
One more thing about those loans you can take out against the cash value of your plan… If you take out to much, it may cause you to have to pay in more premiums to support your expensive whole life insurance policy.
So, not only is it super difficult to access your money, it might cost you even more each month to keep the policy alive.
(Oh, and by the way, if you borrow $10,000 from your policy and don’t pay it back before your death, they’ll only pay you $490,000 on your $500,000 policy. That’s right, they’ll never send you your cash value amount if you die with money in there, but if you take money out of the cash value, they’ll charge you the difference. Hmmm….. that’s a head scratcher).
7) The Estate Tax Benefits Are Just Smoke and Mirrors
Another huge benefit that your whole life insurance sales person will mention over and over again is the shield from estate taxes!
Here’s what they’ll tell you:
- If you take a loan against a whole life insurance plan, it’s tax free income!
- When you die, the death benefit will be awarded to your heirs tax free as well!
Wow, that sounds great! ….Until you think about it for two seconds.
- Life insurance is paid for with after-tax dollars, so it only makes sense that money that comes from it is tax free…so are the earnings from a Roth IRA…
- When you die, the government allows you to will up to $5.4 million to your heirs before any of it is taxed… so the fact that the insurance payouts are tax free is actually kind of a yawner…
Again…sorry life insurance man…but your whole life insurance sucks. Sorry, not sorry.
8) Whole Life Investments are Undiversified
Here’s how the investment portion of a whole life insurance policy works:
- You pay your premiums and you eventually build up some money into your cash value account
- The whole life company invests that money into whatever it is that they see fit
- They then keep a portion of it for their efforts, and
- Then pay you whatever they decide to pay you (typically the minimum guarantee)
In other words, you’re investing your money into one insurance company and have absolutely no control over the returns. If this doesn’t qualify as undiversified, I don’t know what does!
When you invest, it’s best not to have all your eggs in one basket. Instead, you want to invest small amounts into many different companies. That way, if any one of them makes a bonehead move or goes bankrupt, it’ll hardly affect you in the grand scheme of things.
Instead of investing money with an insurance company, it’s best to look at mutual funds and index funds. They’re low cost, you can control the buying and selling of them, and they are inherently diverse by nature!
Whole Life Insurance Sucks – So What’s the Alternative?
You may have already caught on to this, but it never hurts to spell these things out – especially for something as important as this!
I absolutely run from whole life insurance…and I run TO term life insurance.
Term life insurance is better in my book because it:
- is ten times cheaper than whole life insurance,
- allows you to invest in your future on your own and make millions instead of a few thousand in a lousy cash value account that you can never access,
- is also a great reminder that we shouldn’t depend on life insurance to pass an inheritance to our heirs. That should be done with investing outside of insurance companies (it’s way cheaper this way).
What Term Insurance Companies Do I Recommend?
I personally got my term insurance three years ago (when our daughter was born) – through a company called Select Quote. They’re an excellent broker that will find you a great deal on term life insurance through reputable companies.
Today, when people ask me who I recommend for term insurance, I lead them to my affiliate partner, Ethos Life Insurance.
- They only offer term insurance, so I know they won’t sell you on crappy whole life insurance
- The process doesn’t involve a bunch of forms and waiting. They have an app where you can quickly load your answers and get an immediate rate for your coverage!
- Their rates are comparable to all the other insurance giants. I just checked the other day – a 10 year $500,000 policy would cost me just $13 a month!
So, did I get through to you? Are you convinced that whole life insurance sucks??
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.