Should You Buy Whole Life Insurance?
July 27, 2016One of my favorite parts of being an unbiased financial planner is that I have the opportunity to answer questions for family and friends as well, with no concern as to whether there is a conflict of interest or a loss of earning opportunity. I love it when people ask me for help making their decisions. It’s what I do every day, and it’s why I’m in this business in the first place.
A friend recently asked for my thoughts on a whole life insurance policy that she was being pressured to buy after meeting with an agent to discuss disability and term life insurance. She was pretty sure that whole life was bad since that was the thing the agent was pushing the most, which is a definite red flag. If someone is trying to sell you something that you don’t understand, and they’re unwilling to take the time to educate you on why it’s the right thing for you, JUST SAY NO. However, in this case, the answer isn’t cut and dry. This is basically how I answered the question:
The big downside to whole life policies is that they tend to have high fees, especially in the first couple years, when the agent makes their big bucks off commissions. (This post explains a little more about the intricacies and the different types of life insurance.) Whole life insurance is most appropriate for higher income people who are wealthy enough that all their other tax-advantaged ways to save money are being fully utilized.This means that:
1. You and your spouse are both maxing out your workplace retirement savings plans. ($18,000 if you’re under age 50, $24,000 if you’re over. The limits can be higher for self-employed people who have a SEP-IRA).
2. If you have an HSA due to high-deductible health insurance, you’re putting the full $3,400 (for individuals) or $6,750 (for families) into those accounts.
3. You are maxing a Roth IRA (using the “back door” method, if necessary and applicable).
4. You have no debt besides a mortgage, car loan, and possibly student loans as long as the rate is 3% or less.
5. You have at least 6 months of expenses set aside in a savings account.
6. You feel like you have enough extra money every month to do the stuff you want to do within your lifestyle values like travel, caring for pets, entertainment, etc. and you can adequately fund things that might pop up like medical procedures, etc.
If all of those financial needs are either met or you’re on track to meet them, and a whole life policy premium wouldn’t derail them, then they can be a decent investment that can fulfill the “fixed income” part of your long-term investments. That’s how the agent I purchased my small policy from described it. I also decided to purchase my whole life policy because there was a strong chance I may not qualify for long-term care down the road due to blood clot issues (and ironically enough, I got a blood clot exactly one week after my policy was accepted for underwriting – timing was impeccable, and my policy had a cheap rider for that coverage). Here’s how we looked at it:
The annual premium for at least the first 5 years is equal to an amount that we would typically be saving in a bond fund or other less-risky investment anyway. The policy builds a guaranteed cash value and based on the projection of the cash value’s growth, we would break even (aka the cash value would equal and then exceed the total amount of premiums we’d paid in to date) after 13 years. The real question then was whether we would otherwise take that money and save it some other way.
Since the answer was yes, we went with making this a small part of our overall investment savings strategy. Once I’m 65, we no longer have to pay premiums and at that point, we could borrow against the policy and use the cash value as we needed. It’s actually a great way to invest tax-deferred, as long as it’s truly looked at as a long-term investment.
Could we take that money and invest it in a bond index fund for lower fees and expenses? Sure, but there’s no guarantee on the growth of that money, and should I meet an early death (heaven forbid!), my policy would pay its full face value starting from the day we made the first premium payment. It’s worth it to us.
Post was updated 3/9/17 for current savings limits.
Kelley Long is a resident financial planner with Financial Finesse, the leading provider of unbiased workplace financial wellness programs in the US. For more posts by Kelley or to sign up to have her weekly post delivered to your inbox each Wednesday, please visit the main blog page and sign up today.