The Whole Life Insurance ConundrumSubmitted by Castlebar Asset Management on June 22nd, 2017
Life insurance is one of those things in life that you never really want to deal with, but know you need it. Having the right level of life insurance is an important part of a sound financial plan. Knowing what type of coverage along with how much, is central to making sure you are not vulnerable or over insured.
For most of our clients a term life insurance policy is more than sufficient to meet your family’s financial needs should the unexpected happen. Whole life insurance is usually offered as an accompaniment to term. Most people never actually use their term insurance so whole life can seem like an appealing way to get both life insurance coverage and a savings account in one stop.
Whole life insurance is a type of insurance contract that offers you coverage during your entire life span. Another characteristic of whole life insurance is the policy has cash value that you contribute to over time. Term life insurance is the most common type of life insurance. Term life insurance is only good for the length of the term, usually 10, 20 or 30 years. If you stop paying your premiums your term life insurance will no longer be in place. The costs between whole life and term insurance is steep for the level of coverage you receive. Term insurance will provide you with more coverage for less cost while whole life will cover you for your entire life but the costs are much higher. Term insurance does not accumulate cash value while whole life does.
At first glance, whole life insurance looks like a policy that everyone should pair with their term insurance. Whole life is often sold as a savings or retirement vehicle. Mixing insurance with savings is where things get complicated. Determining the cost of insurance, fees paid and returns for the cash value account gets confusing for all that are involved, including the person selling it. Commissions and fees for whole life policies are generally high and returns are usually suboptimal.
Should You Buy Whole Life?
Buying a modest amount can be an appropriate strategy. You can use whole life insurance to cover funeral expense, fees or expenses to settle an estate or leave a modest inheritance to family. An amount ranging from $10,000 to $100,000 is more than sufficient coverage with $50,000 probably being the most realistic amount you would want to have. If you are looking to have more than $50,000 we would recommend you look at other items first.
If you are not maxing out your 401k or other retirement account this is a better immediate use of your money opposed to a whole life policy. You can also look at funding a 529, Health Savings Account or back door Roth IRA as well. If your emergency fund is not in great shape addressing this is a priority over more whole life coverage. Paying off any high interest debt like credit cards or student loans would also be something to emphasize as well. Whole life is a long-term savings vehicle and if you plan to access the cash value in under five years, a regular savings account is the way to go. Fees and commissions to your insurance company and agent reduce the cash value built up during the first five to seven years of your policies life.
High income individuals or business owners may find a greater need for additional whole life coverage. For a high earner, you may have pulled all available levers and whole life insurance is appealing because you are able to borrow against your cash value balance tax free in retirement. Work with your financial planner to ensure this is the best option for you. There may be other investments that can accomplish similar goals. Business owners can also look at whole life coverage to help insure a business partner, help with succession issues or inheritance gaps. Again, work with a professional to analyze if this is the best route.
The whole life insurance conundrum is something you will likely experience in your life. I purchased a whole life policy early in my career. The coverage amount was way too high but an acquaintance was happy to sell this alongside my term policy. This is one of a few financial regrets I made. I realized my mistake early so I only paid a few months of premiums. Educating yourself and getting an independent professional like your financial planner to help evaluate any policy is crucial during the process. Whole life policies are generally sold not bought. Take your time and make sure it is the right fit for you.
Disclaimer: The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.