Whole Life Insurance – It Just Plain Sucks

Yes, I said it. Whole Life Insurance Just Plain Sucks!

12375314_928049877243718_5812538141472930963_oMy Mom always told me to never use that word.  That it’s not proper or nice to use.  And I agree, unless something really does suck.  And whole life fits the bill.

From my seat as a Certified Financial Planner™ practitioner, many people have brought in their whole life statements over the years.  Typically they were sold their whole life policy by a college buddy that was just getting started and they wanted to help them out.  Others are successful business owners that needed some form of insurance and they were told to buy whole life because you can convert it into a cheaper permanent policy down the road.

Whole Life Insurance vs. Investing

What I see is something completely different.  Routinely I see whole life statements that show the death benefit is worth $250,000 and the cash value is worth $40,000.  The person paid $40,000 into this policy over the 20 year period.  So basically, you gave $40,000 to an insurance company for them to provide you with $250,000 of death benefit.  You would have been much better off to purchase a 20 year term policy.  I ran the numbers for you.  A 30 year old male, standard rating, for a 20 year policy with a death benefit of $250,000 is about $270 per year!  When you are young, Buy Term and Invest The Difference.

For the whole life policy you paid $2000 per year for 20 years.  For the term policy you paid $270 per year for 20 years.  If you had invested the difference of $1,730 per year into a Roth IRA using the S&P and starting in 1995 through the end of 2015 you would have a balance of about $80,000.  That’s double the money in the whole life policy!  A huge trade-off in long term wealth, in my opinion.  ($1,730 added annually and compounded at 8.19% for 20 years = $80,854.24.  The 8.19% is the total return of the S&P from 1995 to 2015 accourding to Dalbar’s 22nd Annual QAIB Report)

Here’s the secret where permanent insurance works for you.  You must over-fund the policy.  That means, if the annual premium is $500, then you should put in $1000.  Why?  Because $500 is the minimum amount needed to keep the policy working for you.  The extra $500 mostly goes into the cash value of the account and you have more money compounding for you.  But most people can’t afford to purchase permanent insurance this way.

When should you use a permanent insurance product?

After you have maxed your pre-tax contributions to your company retirement plan (i.e. 401k, 403b, TSP); and you have maxed out your Roth IRA or Non-Deductible IRA.  And if you have kids, you have some money put aside for college.  Then I would consider using life insurance.

Life insurance can work for you, if it’s used properly.  Too often it’s sold for a commission by someone who isn’t a fiduciary looking out for your best interests.  Thus, whole life insurance sucks because it’s costing too many people long-term growth on their money.  You only have so long in life to take advantage of compounding interest and you need to have your money working hard for you each and every day.

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