Earlier this year, I did something I should have done years before – I bought another term life insurance policy to add to the coverage we already had. I’ve had life insurance since I was 25 years old, but our needs have changed and I was starting to feel insecure. I earn more money now, and I have two children, which means I need a larger policy to replace my income.
The craziest part about buying term life insurance is just how easy it’s become. The policy I purchased through Haven Life was also the type that doesn’t require a medical exam – a perk you may qualify for if you’re of average weight and in excellent health.
Why Whole Life Insurance is a Bad Investment
Before I purchased this term policy, however, I was contacted by an insurance agent who wanted to sell me a different kind of life insurance – whole life. Where term life insurance only lasts for the term you select upfront (for this policy, 20 years), whole life insurance is set up to offer a death benefit no matter how old you become.
I instantly balked at the idea of buying whole life, and for more reasons than one. Here’s why I would never buy whole life insurance, and why term life insurance policies suit our family just fine:
#1: Whole life insurance can be absurdly expensive.
When someone contacted me about buying whole life insurance, I instantly shut them down. I thought it was peculiar they suggested I buy whole life insurance without knowing anything about our finances or the type of coverage we might need anyway, so I didn’t let them bombard me with their entire sales pitch.
So no, I don’t know exactly how much they wanted me to pay for the amount of coverage I wanted – $750,000. But, it’s not that hard to figure it out, either.
State Farm actually has a calculator that provides basic quotes for term life insurance and whole life so you can compare. After entering my birthdate, height, and weight along with my level of health (excellent), their calculator spit out a few numbers. For a 20-year term policy like the one I purchased, they suggested I’d pay $62.40 per month or $717.50 annually. For whole life insurance, on the other hand, my suggested premium was $859.13 per month – or $9,875.00 annually.
Obviously, this is just one estimate from one insurer, and I might pay more or less for whole life insurance based on the provider I select. Still, it just goes to show how much more expensive whole life insurance can be versus term coverage. In this case, it costs more than 10 times as much for the same level of coverage.
#2: I don’t understand building cash value I can borrow against.
One of the biggest selling points of whole life, or permanent life insurance, is that it builds cash value you can borrow against. Many whole life insurance policies also pay dividends, but they aren’t guaranteed. As a result, some companies falsely market whole life insurance policies as a complicated mix of life insurance and investments.
But, it’s hard for me to understand the benefit of overpaying (possibly tenfold) for a life insurance policy just to build a quasi-savings account I can potentially access. It can certainly be more nuanced and complex than that, and I’m aware that whole life insurance can be a smart way for wealthy families to leave tax-free money to their heirs. Still, is there actually a benefit for the average family to pay so much for whole life just to build cash value and potentially score dividends?
Consumer Reports sure doesn’t think so. For a study they conducted, they asked for several life insurance quotes for a 40-year-old Illinois man in excellent health. Through their research – and through quotes offered via AccuQuote – they found that this theoretical guy would need to pay $660 annually for his 30-year term policy for $500,000, and $6,760 annually for whole life insurance with the same level of coverage.
While the “excess premiums” go to guaranteed savings that build cash value over time, Consumer Reports showed how you could accomplish the same thing by buying term life insurance coverage and investing the difference.
“Alternatively, you could buy the 30-year term policy and each year invest the difference between the whole- and term-life premiums in conservative 10-year Treasury notes,” they write. After running the numbers, Consumer Reports found that Treasury notes earning 2.17% would provide a higher return on your money. However, they also note there would be no death benefit once the term policy expired.
The bottom line: I don’t see the point in buying an overpriced life insurance policy that builds cash value when I can buy term insurance then save and invest the difference on my own.
In the example policy I shared above from State Farm, I would save more than $9,000 annually by choosing the available term policy over whole life. Most people would be better off saving and investing that money themselves versus pouring it into a quasi-investment like whole life.
#3: I won’t need life insurance when I die.
Another purported benefit of whole life insurance is the fact it’s guaranteed to offer a death benefit no matter when you die, unlike a term policy that only pays out if you pass away within the 20- or 30-year time frame. This is a huge boon if you’re worried about not having money for funeral expenses or leaving a legacy behind. Of course, it would be great to pass away at age 90 and know that your policy is still intact.
But I don’t see why I would possibly need life insurance when I’m elderly. The main function of life insurance, as I see it, is to replace my income while I’m young and still working – while my family is depending on me. If I pass away in the next 20 years, I want to know our bills are covered and my two children will have money for college.
What could life insurance possibly cover when I’m 80 or 90 years old? My children will be adults at that point, and we will have been debt-free for decades. We’re also saving a large percentage of our income and saving for the future, so having a life insurance policy in my golden years will likely be overkill.
#4: I’m creating my own legacy to leave behind.
Another big arguing point for whole life insurance is that it helps you leave behind a legacy for your kids. I won’t argue against that; obviously, any loving parent would want to leave a nest egg for their children if possible. Instead, I would argue that you don’t need whole life insurance to accomplish that.
Instead of pouring money into a whole life insurance policy and hoping it pays off, I would much rather keep more of my money in my own hands. That way, I can continue saving cash, maxing out our retirement accounts, and investing in real estate. Why pay a third party to help you build a legacy when you can use your own money and ingenuity to build one on your own?
The Bottom Line
As Consumer Reports notes, several factors make it difficult to figure out whether whole life insurance is ideal. For starters, they note, insurers aren’t required to disclose what part of the annual premium goes to pay life insurance and which part builds cash value. As such, it can be difficult to calculate or even surmise any sort of “rate of return.”
Not only that, but the huge commissions agents earn selling whole life serve as ammunition for the hard sell. Brian Fechtel, a financial analyst and life insurance agent, told Consumer Reports that commissions on whole life insurance can be as much as 130% to 150% of the first-year premium, which can easily be $10,000 dollars or more. How can you trust an agent’s advice when your decision to buy – or not buy – could easily mean a difference of thousands of dollars for them? In my opinion, you can’t.
But, that’s not the only reason I would never buy whole life insurance. At the end of the day, I try to keep our lives – and our finances – as simple as possible. For me, that means buying a cheap term life insurance policy and keeping control over as much of our hard-earned cash as we can. If I want cash value I can borrow against, I would rather build it in a savings or investment account with my name on it.
- The Complete Guide to Life Insurance
- Five Things a Life Insurance Agent Won’t Tell You
- Whole, Universal, and Term Life Insurance: What’s the Difference, and What Do I Actually Need?
Have you ever purchased whole life insurance? Why or why not?