Whole life is tailored to give lifelong coverage to the policyholder, and while this may seem attractive, there are many reasons why you should balk from buying any whole life insurance package. It has its own perks, but in the long run, it might be a bad investment for you.
Such policies are tailored to pay out to your beneficiaries once you die. For this reason, whole life insurance does not stand out as a good investment decision for most people, unless they need lifetime coverage. Also, the policies have a cash value accumulation component that you can borrow against, and this is usually confusing for most people.
Below are the reasons why you should start rethinking your decision of investing in whole life insurance.
It is Expensive
One of the reasons why most people shy away from whole life insurance is because it is expensive. In addition, most people have opted out because it does not offer the value advertised. Research has shown that about 40% of whole life insurance policies are usually terminated within the first 10 years after purchasing.
One of the biggest selling points of whole life insurance is the cash value it offers. This cash value is usually accumulated over the life of the insurance policy, but it is one of the reasons why whole life is expensive. While the cash value is made available to the policyholder, it usually takes time before you can access the cash.
The cost of coverage and policy fees usually eat up this cash value, which is why the amount does not make sense during the first 10 to 20 years after locking the policy. This may work for a young individual, but it may not be a good idea for an older investor.
So, while the policy demands high premiums, a lot of things don’t add up from an investment point of view.
It is Complicated
When compared to other types of life insurance, whole life insurance is complicated. No one wants to purchase life insurance until they fully understand what it is about and what it does for them. The cash value growth also has different rates and dividend payouts usually vary depending on the company.
Most people often find this difficult and have a hard time understanding how whole life insurance policies work. If you are going to inject money into a life insurance policy with the aim of making an investment out of it, you will want it to be as simple as possible for you. There is no need of putting your money into the policy then later backing out because your expectations were not met.
5 Products Better Than Whole Life and Why
Whole life insurance may not be a great investment, but it does not mean that there aren’t other better options out there for you. If you still want a good insurance investment, below are 5 options you can consider.
Term Life Insurance
Unlike permanent life insurance, term life does not offer a cash value component which is regarded as the investment component of insurance policies. When you view term life from that angle, it may seem like a bad investment idea. But the truth is that it can make a good investment alternative for whole life insurance.
As mentioned, the cash value component will yield very low to zero returns between the first 10 to 20 years of the policy. This can be frustrating to and the individual who had different expectations, and this somewhat explains why a lot of people back out during that period of time. According to InsureChance, even simplified issue no exam life insurance policies, which usually carry a bigger tag, tend to be cheaper than whole life.
As for term life insurance, you will be paying relatively low premiums for a high death benefit. Even better, the period of the term is usually decided on before locking the policy, hence allows you to enjoy your money.
Final Expense Insurance
This could also be another great alternative for whole life insurance if you are looking for an investment. When comparing the two, whole life insurance death benefits are paid out to your loved ones, but those made from a final expense life insurance policies are meant to pay for your final expenses.
So, before buying a final expense insurance policy, access your future financial needs. Do you have an outstanding mortgage loan? When you die how will your estate taxes be paid, and so on. This could be a great investment because your money will be put to use when you die, and help clear out loans, pay off debts, and even cater to your burial and funeral expenses. It might be a good way to lift the financial burden for your loved ones but the bigger picture is that it is a form of investment.
Variable Life Insurance
Variable life insurance has two major components, the insurance and the investment component. It has a cash value component but unlike whole life insurance where it is accumulated, it is put into mutual fund-like sub-accounts.
This means that the cash value component is invested in the stock market, which leaves an opportunity for growth. As such, variable life insurance is better than whole life insurance from an investment point of view.
Universal Life Insurance
Universal life insurance also offers both a death benefit and cash value component that grows on a tax-deferred basis. A major difference between whole life and universal life insurance is that the latter allows you to decide how much goes to the cash value component and the death benefit.
This gives you power over the investment part of the policy, so it gives some form of flexibility than whole life insurance does not have.
A money-back policy is tailored to give back the assured money at intervals. The amount of money given back is a percentage of the total sum and is usually referred to as survival benefits.
The survival benefits are usually paid at fixed intervals, and if you die before the policy matures, the full amount assured will be paid despite the number of survival benefits paid. So, this would be a great investment vehicle because it constantly pays out a certain amount until the full amount is paid out.