Buying life insurance is a major step that plays a critical part in your adult life. It’s a decision to be made quickly and confidently, yet not lightly. Just as you wouldn’t under-insure your car or your home, you shouldn’t under-insure your life. Having that protection in place can provide income to your spouse, children, or other loved-ones in the event of your death. While there are many advantages, one of the greatest is the peace of mind that your family will have a firm financial foundation in your absence. Yet there are many types of life insurance, how do you know what’s right for you? We’re proponents of dividend-paying whole life insurance with a mutual company. So, is it right for you? Let’s explore the whole life insurance pros and cons so that you can make a choice with confidence.
Define Whole Life Insurance
To fully explore the whole life insurance pros and cons, it’s important that we define whole life insurance: what it is, and what it isn’t.
Whole life insurance is a type of permanent life insurance that is designed to last you your whole life. When you agree to the premium structure in the contract and pay your premiums as stipulated, the whole life insurance company must pay a death benefit to you, guaranteed.
This guarantee is ironclad (so long as you hold up your end of the contract), meaning that even if you live until the age of 120, your death benefit will still be paid. Thanks to the endowment clause, if you live past that age, you don’t even need to pass away—the life insurance company will pay the benefit to you directly. So when we say permanent, we really mean that it’s permanent.
This is in contrast to term life insurance, which is insurance that only lasts for a specific, agreed-upon term of your life. You can have a 30-year term, a 10-year term, and many other options besides. Many people choose this route because they feel they only need the protection while their kids are young, or during their mortgage, etc. However, term insurance is an “investment” that rarely pays out—most people never use it. And while we can celebrate life and longevity, we can also recognize that everyone dies, and could therefore benefit from life insurance that sticks around.
Whole Life Insurance Advantages: The Pros
The whole life insurance advantages are vast if you allow yourself to think a bit outside of the typical financial planning mindset. Let’s explore those whole life insurance advantages below.
Whole Life Has Cash Value
When you buy a whole life insurance policy, you get the benefit of access to a cash value account. You can think of your cash value as the equity of your death benefit, just like you build equity in your home. As you pay your premiums, you build cash value until eventually, your cash value matches your death benefit. This signifies that your life insurance is fully “paid up,” and if you’re still alive, you receive that cash value directly. This is the endowment we were talking about earlier. And if you don’t make it to that age, your death benefit goes to your beneficiaries. Either way, the full “face value” of your policy will be paid out to someone.
The cash value is not a separate value from your life insurance. It is, however, the “living benefit” of your insurance policy. Because whole life insurance is a long-term commitment with a higher premium, life insurance companies allow you to benefit from the use of your dollars while you’re alive. You can leverage those dollars via a policy loan for any purpose. This means whole life insurance acts as a liquid savings vehicle. Even better… when you access your cash with a loan, it keeps earning interest and dividends uninterrupted. And compounding interest is powerful!
Whole Life is Guaranteed
We touched on the “guaranteed” aspect of whole life insurance, yet there are many whole life insurance guarantees beyond the death benefit. The death benefit is, of course, one of the most important guarantees. Despite what we may wish, death is a guaranteed event for everyone. If you’re going to pay for life insurance to protect your income and assets for your loved ones, why would you want only temporary coverage? Your spouse and your kids don’t outgrow benefitting from cash, and with inflation the way it is, they can benefit immensely from cash at any age.
The cash value component of your insurance is also guaranteed not to lose money. No matter what the stock market is doing, you can count on your cash value staying stable. Once the floor of your account increases, it won’t sink lower than that. (An exception does include withdrawals, however, that is under your control, not the insurance company’s control.) Y
When you work with a mutual company, you can also be confident that if the company profits, you will participate in those profits. You receive these profits in the form of a dividend. The dividend is unrelated to the stock market, which means you don’t have to worry about losses. While you’re not guaranteed to receive a dividend each year, you can be confident that it’s likely to happen. Life insurance companies have a great track record of paying them, and most haven’t missed a single year in over 100 years. That means they paid policyholders dividends through recessions, depressions, and wars.
Your Premium is Level
You are also guaranteed a level premium. This means that the life insurance company cannot increase or decrease what you will pay for your insurance. You can be confident that what you sign up for will be sufficient in sustaining your policy. While you may think this is a “no-brainer,” it’s actually an incredibly important feature.
See, when you buy term insurance, it starts out very inexpensive. Since there’s no cash value, and the coverage is unlikely to pay out due to its temporary status, companies don’t charge as much. The risk that the company will actually pay a death claim is relatively low. However, the older you get, the higher the risk becomes for the insurance company. If you have a yearly renewable term policy, your premium could slowly creep upwards until it is completely unaffordable. Even if you have a 30-year term, you may have some renewal options…only to discover that the price has gone from a few hundred dollars to a few thousand.
You may also be considering universal life insurance and its “flexible” premiums. This initially sounds like a good idea because you can fund it however you wish. However, this often leads to people underfunding their life insurance policies. With UL, companies often change operating costs due to stock market fluctuations. If the market is down, you may have to pay significantly more to keep your policy from imploding.
With whole life, what you see is what you get. You have some power to choose how long you’ll fund your policy, and the base premium is incredibly transparent. That number will never increase or decrease, so you can build your strategy around it. These level premiums also get better thanks to inflation. And if you want to pay more, you can, thanks to PUAs.
It Makes Other Assets Better
By having whole life insurance, you can actually improve the efficiency of other assets. For starters, you can leverage your cash value to buy assets in a much more efficient way than simply paying cash. With cash, you could buy a single $200,000 property. With leverage, you could buy multiple $200,000 properties with just 20% down payments. By doing so, you can increase your cash flow and the value of the assets you control.
If you have a retirement plan that is correlated to the stock market, your whole life insurance can act as a volatility buffer. When the market is down, rather than pulling an income from your portfolio, you could draw the money from an account like your life insurance cash value. This would give your portfolio some time to breathe, without locking in those losses. Doing this can extend the life of your portfolio by decades.
When you have whole life insurance, you can also use it as a “permission slip” to use other assets. Knowing that you have whole life insurance to provide an inheritance to your heirs, you can use other assets freely without fear of disinheriting your heirs. You can also spend and use those assets more confidently knowing that you have the cash value of your life insurance to back you up.
Whole Life is Great for Legacy
If you want to leave an inheritance to your children, grandchildren, or other family members, whole life insurance is a fantastic way to do that. The death benefit passes to your beneficiaries tax-free, which means that you can give them an ultra-efficient inheritance. Other assets you might wish to pass on can be subject to all kinds of taxes and fees. And while good estate planning can certainly help, whole life insurance will make much of what you leave to your loved ones as optimized as possible.
If you’ve read the Perpetual Wealth book, then you know family financing is a valuable setup for your family’s wealth-building journey. No other asset is quite as suited to this setup as dividend-paying whole life insurance with a mutual company. Family financing helps your family build good money habits that last generations, so that your family’s wealth can last generations. And if you want to leave a legacy and inheritance for your kids and grandkids, you can extend that by generations just by teaching your loved ones the cornerstones of generational wealth.
Privacy and Protection
Another major advantage of whole life insurance is that your policy is safe from prying eyes. The IRS, the government, and creditors do not have access to your insurance information or cash value amounts. Therefore, they can’t try to claim it or otherwise leech off of it. That means you can build wealth in your cash value privately. Additionally, whole life insurance does not need to be reported on FASFA forms, which means your cash values won’t count against you as your children apply for aid and assistance. (Interestingly, though, is that you can use policy loans to finance education if you want to give your kids a more flexible loan option. You can learn more in Busting the College Planning Lies.)
The Disadvantages of Whole Life Insurance: Cons
As you can see, there are many wonderful things about whole life insurance. However, we promised to share the disadvantages of whole life insurance as well.
Whole Life Insurance is Expensive
When you’re shopping for life insurance policies, you’ll notice that term insurance tends to be the cheapest, while whole life insurance tends to be the most expensive. This can mean that getting the coverage you want (like insuring your full Human Life Value) doesn’t fit into your current cash flows.
While it may seem more cost-effective to go with a term insurance policy and call it a day, it’s wise to consider what you want from your insurance. The costs, after all, are not arbitrary—it’s all a trade-off between cost and risk. Term insurance is less expensive because it’s the lowest-risk product for the life insurance company. In fact, 99% of all term insurance policies don’t pay a death claim. For insurance companies, these policies are almost pure profit. For policyholders, they’re almost pure cost.
Whole life insurance, on the other hand, is a guaranteed payout for you AND the life insurance company. Since the company knows it’ll pay a claim, they have to factor this into the cost of insurance. The trade-off is that they allow cash value access to policyholders.
So not only do you get to access the equity of your death benefit while alive, you also know that a death benefit will be paid to someone. This is why we encourage you to think of your policy as a savings vehicle, and your premiums (which directly contribute to your equity), as savings.
This isn’t to say term insurance is bad. It’s actually a fantastic way for people to get full coverage. However, we think there’s a significant benefit in also having some permanent insurance (we like to think of it as an asset, not a cost). It all depends on how you want your insurance to fit into your financial strategy.
You Have to Borrow Against Your Cash Value
For many people, this can be a huge stumbling block. After all, why should you have to pay interest for access to your cash? It’s a fair question, and the answer is that borrowing against your cash value won’t always be the solution. We love cash value because it gives you options. If you want to use it for an investment, you can. If you want to finance a vacation, you can.
Just like with any loan, you have to pay it back. However, unlike other loans, you have a lot of flexibility in how you pay it back. You can create your own payment schedule, and take as long or as little as you’d like to repay the loan. This can make it much more accessible for the average person to finance purchases. All the while, your cash value continues to grow uninterrupted because you did not make a withdrawal. That’s the real power of the policy loan.
This doesn’t mean a policy loan is going to be the solution to everything you do. If you can get a better interest rate with the bank, that certainly can be a better option. If it’s a small purchase and you have the cash on hand, there are instances where that may be the better option. It takes some strategy and self-knowledge to know when and how to use policy loans to your advantage.
There’s an Intensive Application
If you want term insurance, it’s fairly simple to get. You may have to answer a few personal questions, yet overall it’s simple enough you could do it online if you wanted to. For whole life insurance, things are a bit more complicated (which we’ll get into WHY below). It’s better to work with an agent when you buy life insurance, which means you have to involve other humans. (Fortunately, Prosperity Thinkers is all digital, and we can serve all 50 states.) This can already make the process more tedious than hopping online and doing DIY life insurance.
Additionally, you’ve got to answer a detailed questionnaire and go through a health exam. This can seem like a lot, though it’s for a good reason. And hey, think of it this way—you get a free health exam in the comfort of your own home.
If you’re not interested in the human component of working with an agent, just remember that life insurance agents know products really well. By talking through your goals and desires, a person can do a much better job of helping you get the best policy for YOU.
Not Everyone Can Get Whole Life Insurance
Since life insurance companies agree to pay a death benefit guaranteed, whole life insurance is not available to everyone. For example, if you have a terminal illness, the life insurance company isn’t going to agree to insure you. The companies use actuaries to determine the risks associated with insuring someone based on their age and health. And, unfortunately for some, insurance companies only want to take the risk of insuring people who have a good chance of living a long life. It may seem unfair, yet it’s how they are able to operate a business that is successful and beneficial to many people.
Think of it this way: the moment you pay your first premium, the life insurance company is officially on the hook. If you died the next day, they’d have to pay up, even if you only paid a fraction of the cost for that claim. If they did that all the time, they’d be out of business and unable to help anyone. So instead, they require a thorough application. This helps the insurance company work with people who are likely to live long natural lives, thus balancing the cost and risk.
If you want life insurance and can’t get it, there are some other good options available to you.
Whole Life Insurance Pros and Cons: Should You Buy Whole Life?
As you can see, the whole life insurance pros and cons are numerous. To put it simply, if you want the protection of life insurance, coupled with the certainty and liquidity of a cash value account, there are plenty of good reasons to get whole life insurance. There are some cons to whole life insurance, yet in the grand scheme of things, we think they pale in comparison to the advantages of whole life insurance.
If you’re still on the fence, we recommend reading “Whole Life Insurance: The Ultimate Guide.” In the article, you’ll learn everything you could want to know about whole life insurance and how it works.
Want to crunch the numbers? If you’re interested in a policy and want to see how it fits into your finances, connect with us. We’ll show you the real numbers so you can see how whole life insurance fits into your life. If you have questions or aren’t sure, shoot us an email at email@example.com.
Disclosure: Our content is meant for educational purposes only. While it’s our goal to help you learn about building a life of prosperity, we do not intend to provide financial advice. Please consult your financial, tax or legal advisor before making any investment or financial decisions.