Whole life insurance has a bad reputation.  It isn’t perfect but then again it wasn’t ever meant to be.  When used for the right purpose, however, it can fit perfectly into a financial plan when there is a need for life insurance.  You hear a lot of talk about the negative aspects of whole life and what it doesn’t do such as:

  • It’s so expensive.  Who can afford it?
  • The interest rate is ridiculously low.
  • Term provides a much higher death benefit.
  • It would be better to invest the money in mutual funds than in whole life.
  • Your insurance agent makes a big commission on whole life.

When I read negative articles about whole life, I just simply think to myself, “They don’t get it.”  I am not here to argue which is better or try to sway anyone one way or the other.  I have no skin in the game.  I don’t sell investments or insurance anymore since I made a life changing career decision to go into unbiased financial education five years ago.  I can tell you though, I’ve had a whole life policy for 10 years and I love mine.

I don’t ONLY have a whole life policy – I have both term and permanent.  My term insurance is a 10 year level policy that I have had for 9 years, so it won’t be “level” anymore after next year.  It will go up substantially, but I figured by then my last child would have graduated from college and I wouldn’t need it anymore.  I’ll decide next year whether to pay the new current (much much higher) rate for the term, get another policy (still at a higher rate since I am 10 years older if I am healthy enough to qualify) or drop it all together.  The good news with the term is that I’ve been covered for $300,000 for 9 years, and I am still here to see my son graduate from college since I didn’t die (and hopefully won’t in the next year).  When you think about it though, I guess this policy was pretty expensive since I get no financial benefit if I live another year — only piece of mind and ten years of premiums down the drain.

You never think about the day you have to “drop” your term insurance.  A year from now, I’ll have to sit down at my desk and sign a piece of paper canceling it.  I am not so sure I like that.  One day I have $300,000 coverage and the next day I don’t.  That is the problem with term – it is temporary.  I certainly will drive carefully the day I drop it since my family will no longer have that additional death benefit.  I am so glad I will still have my $150,000 whole life policy that won’t go away.

My premiums are five times higher every month for the whole life than my term for half the coverage, so I am paying in more, but on the other hand I’ll be getting a lot more especially after next year.  Between the two policies, though, I think I have the best of both worlds – a high insurance amount when I needed it (with the term coverage), continued coverage for the rest of my life, and cash value that is secure and growing (with the whole life policy).  My whole life policy didn’t gain much cash value for the first three years, but now it is flush with increasing the cash value and dividends.  It is also earning the highest rate I have seen anywhere!  Banks are paying less than a half a percent and my policy is earning a rate of return of over 4.5 percent.  I always saw these funds as my “safe” money, and invest for long term growth elsewhere, but never expected the policy to pay higher than the bank.  Whole life also has incredible tax advantages since the cash value grows tax deferred, I can also pull out funds if I need them up to the amount I put in without incurring taxes (most investments use “last in first out,” so you have to pay taxes on all withdrawals), or I can borrow from the policy tax free.

If I am having a financial hardship, and I want to make sure the policy will stay in force, I can get a loan with the built up cash value to pay the premiums.  I can convert it to a “paid up” term policy if I don’t want to make premiums anymore.  If I want to keep it, I can add additional funds (up to certain limits) to increase my cash value and because it is paying the highest rate in town.  I’ll be able to use the cash value as I want to but either way my family will get a benefit.  Whole life isn’t for everyone but it may be good for some people.

When is whole life a good idea?

  • When you need or want insurance (for someone you love)
  • When you want a policy for a lifetime – a death benefit that never goes away
  • When you want to build cash value – as your conservative money
  • When you want tax advantages – an income tax free death benefit and tax advantage benefit for you
  • When you don’t need a high insurance amount (because you have a term policy also or simply don’t require a high face amount)
  • When you want a fixed premium for the rest of your life and have the ability to pay more when you are younger

When I retire, I plan on being similar to those senior citizens with the bumper sticker that says, “I am spending my children’s inheritance” in that I plan on spending every dime of my 401(k) and really enjoying my retirement.  However, I do want to leave something to my children, and the whole life policy can help me out with that.  If I need the cash value, I’ll use it as a back- up for me, but hopefully it will go to them (or at least some of it!).  With whole life, I don’t have to drop it just because I turn 65.  I know whole life might not be perfect, but it fits perfectly into my financial plan right now.  I didn’t love it the first year when there was no cash value, but as the saying goes, “some things get better with age” and my whole life policy is one of those things.

(Watch for a future blog on how to choose a whole life policy and an insurance agent.)