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Pros and Cons of Whole Life Insurance

Whole life through the years has been both lauded and maligned.  Which is right?  The answer is, it depends.  Here’s an evaluation of the pros and cons of whole life insurance to help you answer that question.

Cons:

  • As an investment. Whole life insurance develops a cash surrender value, so these polices are sometimes viewed as an investment.  When viewed as an investment, whole life insurance polices are very illiquid – it’s not an investment type that you would use for short term investing or if you may need the money on short notice.
  • Confusing and complex. Whole life policies have a variety of complex structures that are difficult to compare and thus evaluate.  Premiums, dividends, and costs can interact over time and are difficult to predict accurately.
  • Possibility of failure.  Some (not all) whole life structures contain a possibility of failure.  Of note are ‘premium offset’ structures where future premiums are expected to become fully paid up.  If those premiums are coming from non-guaranteed dividends then poor performance of dividends over the years can result in your policy either collapsing (being cancelled) or requiring high premiums in the future.

Pros:

  • Cash values as an investment.  In some tax situations, the cash value can be a strong tax planning strategy.  See our Insurance Retirement Plan page.
  • Guaranteed Cash on Death.  If you’re looking to guarantee an amount on death, there are few if any options that will provide the same level of guarantee upon death.
  • Inexpensive cash on death.  If you’re looking to guarantee an amount at death, life insurance is likely the least expensive way to accomplish this.  Simply saving an amount in a guaranteed investment choice will probably cost you more than a whole life insurance policy.
  • Death benefits level or increase over time.  When dividends are used to increase your coverage amount over time, these dividends are ‘vested’ in the sense that they can’t be taken back or go negative.  Increases are locked in.  Even if dividends should go to 0, your death benefit will not decrease (compare to a equity type investment which can have negative earnings.

Depending on your circumstances, whole life may be a very good fit.  Also depending on your circumstances there may be better, cheaper options.  For a proper (and free) evaluation of your life insurance needs and to see if whole life is the right choice for you, please call 1-877-344-4011 and speak to an experienced advisor.

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