Should I purchase whole life insurance?

Whole life insurance is one type of permanent life insurance that can provide lifelong coverage. It provides a variety of guarantees, which can be appealing to someone who doesn’t want any guesswork after buying life insurance. Should I purchase whole life insurance? Why or Why not?

Whole life insurance combines an investment account called “cash value” and an insurance product. As long as you pay the premiums, your beneficiaries can claim the policy’s death benefit when you pass away.

What is whole life insurance?

There are two main types of life insurance: term and permanent. As a type of permanent life insurance, whole life stays with you throughout your life (unlike term insurance, which only lasts a designated period of time). Once you purchase a policy, as long as you continue to pay your premiums, you will be assured of a death benefit after you pass away.

But there’s more to whole life policies than that. They also feature an investment component. Your premium payments go toward funding your death benefit and paying administrative costs, but a portion also gets tucked into a savings account where it grows throughout the life of the policy. This amount, called the cash value, can be borrowed from during your lifetime if needed.

Whole life insurance offers three kinds of guarantees:

A guaranteed minimum rate of return on the cash value.
The promise that your premium payments won’t go up.
A guaranteed death benefit that won’t go down.

While it can sound like a good choice, there are often better options for individuals who want life insurance that will last as long as they live.

Some people use the phrase “whole life insurance” very broadly to refer to any type of life insurance that can provide lifelong coverage. But there are other types of permanent life policies that can provide lifelong insurance. These policies work very differently from traditional whole life insurance and include:

Universal life insurance.
Variable life insurance.
Survivorship life insurance.

Is whole life insurance a good investment?

The simple answer: it depends. It pays to put some thought into what you hope to achieve with a whole life policy, and to look carefully at the return on your money that you will achieve through the cash value.

For people who just want a life insurance policy that pays a death benefit and nothing more, term insurance is a better option. It’s inexpensive, easy and protects you for a term of years that you decide on. The money you save on premiums can be invested elsewhere as you see fit, taking into account your comfort level with risk.

Whole life insurance, meanwhile, will be three to four times more expensive than term, although some of that comes back to you through the policy’s savings component. Your money will have been invested in low-risk, low-return funds, so the interest won’t be as high as if you invested in the stock market or another more volatile option over the long term.

Unless you are financially conservative and just looking to protect your capital, it’s probably not a good idea to use a whole life policy as your primary investment vehicle.

Pros and cons of whole life insurance

Pro	Con
Provides death benefit for your beneficiary	Policies are more expensive than term insurance
Stays with you your entire life (as long as you pay the premium)	Taking a loan reduces death benefit unless you pay it back
Premium rates are guaranteed	Cash value accrues slowly, with low interest
Able to borrow from cash value of policy on tax-deferred basis	More complex than term insurance
Forced savings component builds wealth	Equity not available for first decade or so
Can be one part of a balanced financial portfolio

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