Does Whole Life Insurance Ever Make Sense
If you’ve ever gone searching around the internet for quotes on life insurance or recommendations for which type of life insurance you should buy, the answer that almost always comes back is that term life insurance is a better choice than whole life insurance.
As a refresher, term life insurance carries a stated death benefit to the beneficiary of the policy over a stated number of years for a monthly premium. Whole life insurance carries the same death benefit feature but also has an added investment component. Premiums with a whole policy are typically significantly higher because the policy builds cash value over its lifetime whereas the term policy carries no such cash value.
The reasons why term insurance is preferred are pretty simple too. Premiums on term life insurance are much cheaper and the investment component that comes with whole life insurance usually isn’t cost effective and, in most cases, isn’t a very good performer. Someone who holds a whole life insurance policy typically has to hold on to it for many years before they typically break even on it.
And that brings us to today’s questions – if whole life is so expensive and usually doesn’t perform that well, are there cases where it actually does make sense to hang on to it? The answer is yes there are but only a few. If you qualify under one of the following criteria, whole life insurance may be a consideration for you.
You plan on hanging on for the long term
With premiums so much larger than term life premiums, you’ll need to hang on for a good long time before the cash value part of the whole life policy makes up for all those bigger premiums you’ve been paying. That means you’ll need to hang on to the whole life policy for 15 years or more. If you’re certain you’ll be hanging on to the policy for 20 years or so, you could come out ahead on a whole life policy.
You have no investment plan
Advisers recommend that people get life insurance while they’re young because by the time they near retirement age it’s expected that they’d build up enough of a nest egg to pay for any expenses that life insurance would otherwise provide for. But what if you don’t have that nest egg? You might not have enough time left to build a significant portfolio. In this case, life insurance might be your best chance to provide a six of seven figure death benefit to your heirs.
You want to pass wealth to the next generation
Constructed properly, life insurance policies can pass the death benefit on to their beneficiaries while avoiding the estate taxes that a normal investment portfolio might incur. Some people like to set policies with this purpose specifically in mind. Again, if constructed properly this could be a good way to get assets into the hands of your beneficiaries without Uncle Sam taking a cut.
In virtually every other instance though, a term life policy usually makes more sense. Life insurance is designed to be pure protection against an unexpected death and the financial consequences that come with it. They’re not designed to be investment vehicles.
When in doubt, buy yourself a good term life policy and invest the rest.
Photo credit: mandsprops
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