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Why is Whole Life Insurance a Bad Choice?

Are you trying to decide whether you should get whole life insurance? With so many insurance plans to choose from, making a decision can be challenging. This is especially true because insurance agents are highly aggressive salespeople that are typically trying to earn a commission. 

You’re in luck. In this article, we’ll go over what is whole life insurance and its key disadvantages. By the end of this post, you will have a good understanding of whether or not a whole life insurance policy is for you.


What is Whole Life Insurance?

Whole life insurance is a type of permanent insurance that stays in effect for the entirety of the policyholder’s life, provided they pay their monthly premiums. It guarantees that the beneficiaries of the policy receive a tax-free death benefit when the policyholder dies. 

The key feature of whole life insurance is that it accumulates cash value over time. This cash value eventually becomes an asset, and in some whole-life policies, policyholders can withdraw funds or borrow against it. As a result, whole life insurance accounts serve as investment or savings accounts and insurance accounts. 

With a whole life insurance policy, your monthly premiums are fixed for the life of the policy regardless of the market conditions. This makes whole life insurance easier to budget over your lifetime but they are also significantly more expensive than other life insurance policies. 

Applicants for whole life insurance may also need to undergo a medical exam for approval, a requirement that may or may not be part of purchasing term life insurance.


1. Expensive Compared to Other Life Insurance Plans

Whole life insurance is significantly more expensive than term life insurance or other life insurance options. While the exact price difference varies, whole life insurance can sometimes be 10 to 15 times more expensive for a similar death benefit. 

There are two main reasons insurance agents will justify the higher cost of whole life insurance. The first is that whole life insurance is permanent and will pay out a death benefit regardless of when you die whereas term life insurance policies have a fixed term. However, term life insurance is significantly cheaper and you can always renew it when the term ends.

For example, a $250K death benefit with a term life insurance policy might cost $25 per month, whereas a whole life insurance policy might cost $250. That additional $2,700 per year could be spent on investments, vacations, other assets, or bills over the years. 

The second reason agents justify the higher cost of whole life insurance is that it functions as an asset, accumulating cash value over time that you can withdraw from or even use as collateral. While this is true, this growth is much slower compared to many other investment options. This is because only a small portion of your monthly premium goes towards the investment account, while the remainder goes towards your insurance policy and fees to your insurance company. 


2. The “Cash Value” of Whole Life Insurance is Overrated

Whole life insurance policies attempt to serve two purposes: act as an insurance account and as an investment account. The result is that whole life insurance doesn’t perform either function very well compared to other accounts that focus on just one. 

For example, although whole life insurance policies build a cash value, the growth of the cash value account is often very slow and minimal compared to other investment or retirement accounts. As mentioned above, the main reason for this is that only a small portion of the monthly premium goes toward your cash value account. This means that you can often get better returns with the same benefits if you invested that same money into IRAs, 401Ks, or other common retirement accounts. 

Returning to the previous example, for a $250K death benefit, a whole life insurance plan costs $250 per month and a term life insurance plan costs $25 per month. In most cases, you can opt for the term life insurance plan for $25 per month and invest the additional $225 in a retirement account and end up with much better returns. 

The simple reason is that the investment account of your whole life insurance is not as effective as other retirement accounts and it only receives a small portion of your monthly premium. 



3. Cash Value is Not Transferable to Beneficiaries

One point that is often overlooked by insurance agents is what happens if you don’t use the cash value of your whole life insurance plan. Most people would assume that the cash value also goes to the beneficiaries.

However, that is incorrect. The cash value of a whole life insurance policy does not transfer to beneficiaries upon the policyholder’s death. The beneficiaries of the whole life insurance plan are only entitled to the amount of the death benefit. 

The cash value can only be used by the policyholder during the term of the policy. Any cash value in the account at the time of the policyholder’s death will go towards paying the death benefit, and if there is anything remaining, the life insurance company gets to keep it. 

The issue with this is that the cash value of a whole-life policy is often not substantial until the later end of the policy. At that stage, most policyholders have multiple retirement accounts, savings, and investments if they need additional funds. Consequently, it’s very likely that once the cash value grows, policyholders are less likely to need it. 

This means that policyholders are forced to use their cash value at some point to ensure the money and growth that accumulates over the length of their policy does not get pocketed by the insurance company. 

If you have no intention or are unlikely to use the cash value portion of a whole life insurance policy, then you should consider buying term life insurance or another life insurance policy. 


4. Most People Cancel Whole Life Insurance Before Seeing a Return

The reality is, because of the high premiums and low death benefits, a high percentage of people who purchase whole life insurance end up surrendering their policy before they use it.

The high premium associated with whole life insurance often makes it difficult to pay over the long term. When policyholders experience financial hardship, paying the high monthly premiums can be a burden that they decide to forgo at the moment. 

Another common reason that people cancel whole life insurance policies is that their level of protection often changes as they get older and life situations change. Whole life insurance policies are often less flexible than other life insurance plans. 

For example, individuals might need to increase or decrease their death benefits later in life. With whole life insurance, the death benefit is fixed and you are not allowed to change your death benefit after the onset of the policy. 

The high cost, lack of flexibility, and permanent nature of whole life insurance make it difficult for people to maintain for their entire life. 


5. Only Ideal if You Have Beneficiaries That You Want to Award a Death Benefit 

Another reason that whole life insurance is considered undesirable is it’s only advantageous if you have beneficiaries to whom you want or need to award a death benefit. Without beneficiaries, there is really no need for a whole life insurance plan. 

Absent beneficiaries, there are only a few reasons why you might need whole life insurance. If you don’t have beneficiaries and you are only using whole life insurance for the cash value as a savings account in case of an emergency, there are much better options that can perform this type of service. 

To ensure that you have a savings account or safety net during hard times, you can invest your money in other retirement accounts that will reward you with significantly better returns. 


6. The False Allure of Indexed and Variable Whole Life Insurance         

Our discourse today might be viewed as an attempt to denigrate all insurance agents. It’s not. There are many fine men and women working in the insurance field who will put your needs first and sell you only what you need. Sadly, they’re in the minority and don’t typically last long in that business. Making money via high commissions is the primary motivator in the field.

This is not the first time that the truth about whole life insurance has been exposed. The insurance industry has responded by offering variations on whole life insurance. Unfortunately, these aren’t any better than the base product. Think of it as getting a new paint job on an old vehicle that constantly breaks down. It looks nicer, but it still won’t take you where you need to go.

One example of this is indexed whole life insurance. The funds put aside for cash value are invested in an index fund, giving the policyholder an opportunity to get a better return on their money. Unfortunately, that cash value doesn’t outlive you, and most of it will go to your death benefit. You’ll also pay higher fees for indexed whole life insurance.

Another option is variable whole life insurance, which gives the policyholder decision-making power over where their cash value money is invested. However, it’s not complete freedom, as the insurance company provides a list of funds to choose from and will charge a high fee to manage the investment account. Like most whole life insurance, this is not a winning scenario.


The Inevitable Sales Pitch for Universal Life Insurance 

Physicians using the points highlighted in this article as objections to buying whole life insurance policies will inevitably hear an alternate sales pitch for universal life insurance. The insurance agent will use words like “permanent” and tell you how cash-value life insurance should be an “integral part” of estate planning for your family. Don’t buy into any of it.

Universal life insurance was introduced in 1979 when surging oil prices and the Federal Reserve Bank’s inability to curb inflation caused a recession. Sound familiar? The flexibility of premiums and death benefits made it appealing in that climate. This gave policyholders more control while still offering the “advantages” of permanent life insurance. 

Like whole life insurance, universal life insurance comes in many forms. One of the attractive features is that policyholders can withdraw or borrow funds from their cash value while they’re still alive. On the downside, funds in savings-based universal life are dependent on interest rates that fluctuate. As a result, indexed universal life policies are subject to market volatility.


Term Life Insurance Versus Whole Life Insurance

The big question you will likely have to face is whether to choose whole life insurance or term life insurance. It’s important to note insurance agents will target physicians due to their high net worth. They understand that high-earning individuals want the best. 

As a result, they will typically try to sell you on the more expensive and high-commission whole life insurance due to the cash value and permanent nature of the life insurance policy. 


What is Term Life Insurance?

Term life insurance is a type of life insurance that has a fixed term length. This means that if you die during the length of your policy, your beneficiaries will receive your death benefit. Once the term ends, your beneficiaries will no longer receive the death benefit.

Upon the end of your life insurance term, you will have the option to renew your life insurance for a new term.

Unlike whole life insurance, term life insurance does not build any cash value to the account. Term life insurance is simple and straightforward. You pay a monthly premium for the term of the policy and, if you die during that period, your beneficiaries receive a tax-free cash death benefit determined at the onset of the policy. 

Term life insurance is often significantly cheaper than whole life insurance. This can vary depending on the insurance company but comparisons often show that term life insurance can be anywhere from 10 to 15 times cheaper for the same death benefit. 


Other Investment Alternatives You Should Explore

Let’s view your investment portfolio from a holistic perspective. An insurance agent or broker-dealer registered rep will tell you that insurance should be part of that portfolio. They might even recommend an annuity to “enhance” your retirement income. Look at the cost versus return on each of those. There are several superior alternatives in which to invest your money.

Despite market volatility in Q4 last year, escalating interest rates, and rising consumer prices, the S&P 500 generated a return of 7.5% in the first quarter of 2023. Its 10-year average return is 12.15%. Nasdaq, much to the surprise of many investors, has gained 9.6% YTD as of the writing of this article and a whopping 17.13% in ten years. 

Do the math. The average cost of a $5 million whole life insurance policy is $2,280 per year. Invest that in the market, assuming a 10% return, and you’ll have over $450,000 in just ten years. Best of all, it will be completely liquid. You don’t need to borrow against it if you need the funds and your loved ones will inherit it in full when you die. Whole life insurance doesn’t promise that.  


The Bottom Line

Whole life insurance is not a great investment for most people. First, term life insurance is much more cost effective than whole life insurance. Second, you can invest in many other financial vehicles that will generate higher returns than the cash value of your whole life insurance policy. Finally, you can easily make your term life insurance last the length of your life by having an automatic renewal to ensure that your beneficiaries are always covered. 

About the Author

Kevin D. Flynn is a retired financial professional and former fintech coach for RIAs and financial planners. He lives in Leominster, Massachusetts with his wife Evelyn, two cats, and ten wonderful grandchildren.



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5 thoughts on “Why is Whole Life Insurance a Bad Choice?”

  1. Is there another potential benefit of asset protection with whole life insurance due to its face value and growth? As a physician, I always worry about above liability limits judgements in malpractice cases. Beyond the protection of malpractice insurance and asset protection afforded by ERISA accounts (401ks, profit sharing plans), 529 plans in some states, and other state specific homestead/property exemptions, I worry about money sitting in a brokerage account as potentially being as risk. My understanding is it varies by state, but can whole life insurance potentially play a role in asset protection?

  2. Subscribe to get more great content like this, an awesome spreadsheet, and more!
  3. This discussion ignores one fact about whole life insurance – the premiums can be covered by the dividends. I bought a $250,000 death benefit whole life policy when I was in my 20s. I paid premiums for 7 years (about $30,000 total). Since then, the premiums has been covered by the dividends, and the cash value has increased almost every year, last year by more than $8,000. It now has a death benefit of $340,000 and a cash value of $192,000. While I agree that this is not a great ROI, I have not made a payment into this policy in more than 30 years, I have had the protection of the death benefit (or rather, my family has), I have had the ability to tap it for cash if needed (I haven’t), and my heirs will have tax-free cash to pay estate taxes when the time comes. I supplement this with a 20-year, level premium term policy, for which I am paying a monthly premium. Were I to renew this when it comes due in a few years, the premium would be exorbitant, as I will be in my 70s at that time. Overall, I still think it was the right choice for me. While that may not be true for everyone, I think it is important to include all of the upsides of whole life insurance.

      • Northwestern Mutual. Bought the policies in my 20’s, before I got married. Also have some variable life with them, with similar performance (bought $150k face value, which also has increased along with growing cash value). Would never buy them now as the premium at my age would be much too high. (Separately, also bought disability insurance with them, for me and my wife. On her policy, we actually made money the first two years as they covered maternity leave as a disability in those days. They no longer do that!)

        • Hey Hank glad whole life worked for you. Seems though not the optimal track for you to build wealth as that $30,000 of premiums invested in VTSAX for 40 years would have turned into $1.3 million according to a financial calculator. You only have $200k of cash value.

          Unfortunately it was a financial disaster for me and my wife, both doctors. After 7 years in our northwestern mutual policies the dividends didn’t even come close to paying the premiums. My wife and I had paid to 65 whole life policies with $1mil death benefit, dividend was $3500 each in a good year but premiums yearly were around $14,000 for each of us! Me and my wife were in $31k of credit card debt trying to pay the $28k yearly premium! Northwestern Mutual told me to keep feeding the beast and that we should cut our lifestyle, and luckily that it when I read WCI and got financially literate and got out of this disastrous product. Now I am saving more money for retirement than ever and out of credit card debt, and funny is I did not cut my lifestyle at all.

          Make no mistake, permanent life insurance prevented you from making more money, and in my case, it brought me and my wife into credit card debt. I cannot emphasize how financially detrimental this product is unless you really have a reason to need a permanent policy (disabled child, keyman insurance, huge estate tax problem).

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