Wednesday, June 15, 2022

Why Whole Life Insurance Is A Bad Idea

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Buy Life Insurance While You Are Young And Healthy Because Rates Are Low

This is Why Whole Life Insurance Sucks!

As a young adult, your death would not create a financial hardship for others, unless youre married or have children. If youre young and single, you dont need life insurance at all.

Premiums are lower for young people who are healthy, which makes sense because your probability of dying is low. That doesnt mean you need insurance now. Paying insurance premiums when nobody is dependent on your income is a big mistake, especially if you could be putting that money toward other goals like retirement or buying a home.

The difference in earnings you could realize by investing the money instead of paying permanent insurance premiums is enormous.

Is A Whole Life Policy Worth It

When it’s Worth it to Invest in Life Insurance. Whole life insurance is generally a bad investment unless you need permanent life insurance coverage. If you want lifelong coverage, whole life insurance might be a worthwhile investment if you’ve already maxed out your retirement accounts and have a diversified portfolio …

Reason #: The Claim Of Tax

One of the big selling points of whole life is the tax-free retirement income. What theyre describing is your ability to take out loans against your policy, which are not taxed. This can indeed be an attractive feature of the policy, but it comes with several warnings.

First, although there are no taxes, there is interest. When you borrow from your policy, interest starts accruing from day 1 and keeps accruing until you pay back the loan. If youre using it for retirement purposes, are you going to pay back the loan? Of course not. So the interest keeps accruing. And that interest applies to all money withdrawn, including your contributions, which were already taxed.

Second, these loans reduce the death benefit of the policy, which may or may not be important to you.

Furthermore, you can run into complications when you withdraw too much from the policy and theres no longer a big enough cash value to support the premium payments. When this happens, you either need to put more money into the policy or the policy will lapse and then you will face tax consequences.

So no, there arent taxes applied those to loans, but there are plenty of costs. Whole life insurance policies are fraught with complications like this that the salesmen never tell you about.

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Living Benefits Allowed On Life Insurance

Personally, I think this an important reason to purchase whole life insurance.

Even for young adults today.

Yes, you heard me right.

You might be young and healthy now, but there are no guaranteesnone that you will remain healthy in the future.

In fact, I can bet most of you reading this will:

  • face a severe, critical illness,
  • need to care for someone,
  • need care for yourself to bath, dress yourself, or
  • encounter a severe injury or paralysis

We dont want to think these events wont happen, but they will for a majority of us.

You can look no further than the cancer statistics. Cancer does not discriminate, and it affects both young and old people alike. Young adults: you can look no further than the passing of actor Chadwick Boseman.

So, anything can happen at any time.

OK, John. You have my attention.

Who Qualifies For Universal Life Insurance

5 Reasons Why Whole Life Insurance is Bad

In general, youre likely to qualify for universal life coverage unless extenuating circumstances cause your application to be denied.;

Factors that could cause you to be denied include:

  • Poor physical health: Insurance companies may decline to provide coverage for individuals with serious health conditions.
  • Age: Most insurance companies will only provide life insurance coverage for individuals under a certain age.
  • Lifestyle: Insurance companies may be more likely to deny coverage to individuals with high-risk hobbies, a high-risk job, or unhealthy habits.
  • : Insurance companies often run credit checks before underwriting insurance policies. If you have poor credit or a poor financial history, you may struggle to qualify for a policy.
  • Criminal record: You may be denied life insurance coverage if you have a criminal record, especially if you have felonies on your record.

As with any life insurance, even if you qualify for coverage, factors like your health, age, and lifestyle may affect the price of your premiums.;

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Reason #: Lack Of Transparency

Whole life policies include many fees that are never explained to you. Theres the commission to the salesman. There are administrative costs. Theres the cost of the insurance.

I challenge you to find an example of a whole life illustration that clearly details these costs for you, similar to the way a mutual fund has to tell you the expense ratio, sales commissions, and other fees. They just arent transparent, which makes it impossible to understand what youre truly paying for.

And there are many other terms and conditions that make these policies very complicated. One such example is the issue described above where borrowing too much from your policy can cause it to lapse. Another is the guaranteed interest rate thats actually much lower than what they state.

Even the salesmen selling these policies often dont understand how they work. One salesman, after I asked a number of questions he didnt know the answer to, showed me his watch and said that he didnt know how it worked, he just knew that it worked. Whole life, he said, was the same way.

Is that really the kind of person you want to trust your money with?

Your Return Will Be Much Closer To The Guaranteed Amount Than The Projected Amount

When you are shown an illustration, they always show you the projected amount, but you don’t ever get that.; There may or may not be a chart of the guaranteed amount, which will be significantly lower.; But you ought to pay far more attention to that, since the company has just about zero incentive to pay you any more than the guaranteed amount.; In my limited experience, I barely made more than the guaranteed amount and didn’t get anywhere close to the projected amount.

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Look At Those Dividends In The Policy You Cant Earn Those In Your Portfolio Plus That Growth Is Tax

Dividends for a permanent whole life insurance policy are a combination of the investment gains the insurer earns on your capital, plus the difference between how much the company collected in premiums .

Dividends are an estimate, but they are rarely emphasized as such. Policy illustrations often restate projected dividends and future cash value, so the projected growth of your cash value is far from guaranteed.

Now You Know Whole Life Insurance Can Be A Good Idea To Buy

Is Whole Life Insurance a Scam?

Now you know the reasons why whole life insurance is a good idea. Is it right for you?

We can help as we have the independent knowledge to assist you in the right decision. We arent beholden to any insurance carrier, but we are beholden to you and making sure our recommendations fit your needs and situation. If we feel you need whole life insurance , we will tell you. If something else, we will tell you that, too. Feel free to reach out to us via our contact us page or through the form below.

Theres no risk with contacting us. At the very least, youll learn something new, and we will part as friends.

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Is Whole Life Insurance The Right Choice For You

Here are questions and alternatives to help you decide if whole life insurance is right for you.

  • Do you need life insurance for more than 30 years?
  • Do you need cash value life?
  • Do you want flexibility with payments or the payout amount?
  • Do you need a payout when you pass away, or only after both you and a spouse pass away?

How Does Whole Life Insurance Work

Whole life insurance: This is insurance you buy for the length of your life. Unlike term insurance, whole life policies don’t expire. The policy will stay in effect until you pass or until it is canceled. The initial cost of premiums is higher than it is with term insurance because of the length of the policy.

  • Does a whole life policy expire?
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    Whole Life Insurance Has Low Returns

    If you buy a whole life policy today while you are in your 30s, and hold it until you die, over a period of 50 years you should expect guaranteed returns of 2% per year and projected returns in the 4-5% range on the cash value. Your actual return is likely to be somewhere between the guaranteed and the projected returns. Remember, the dividend rate is NOT the return on your investment. If I’m going to tie my money up for 5+ decades, I expect a better return than 3-4%.

    Picking Life Insurance Beneficiaries

    Why Whole Life Insurance Is a Bad Investment

    When you buy a policy youll choose a life insurance beneficiary to receive the death benefit. You dont have to split the payout equally among beneficiaries. You can designate the percentage for each, such as 75% to Mary and 25% to John.

    Its also a good idea to also designate one or more contingent beneficiaries. These folks are like your backup plan in case all the primary beneficiaries are deceased when you pass away.

    Designating beneficiaries is an important task, as is keeping your designation up to date with your wishes. The life insurance company is contractually obligated to pay the beneficiaries named on the policy, regardless of what your will says. Its wise to check once a year to verify your beneficiaries still reflect your wishes.

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    Why Is Life Insurance A Bad Investment

    When people ask this question, they’re usually asking about whole life insurance. Unlike term life, whole life comes with an investment account baked into the policy.

    These are the main reasons that might stop you from buying a whole life policy.

  • The returns are low and slowInsurance companies usually advertise an impressive rate of return. But the actual guaranteed rate is probably much less. In most cases, the returns are 1-3%.
  • But say you’re ok with those returns. It will still take 20+ years for the cash value to exceed how much you’ve paid in premiums.

    Opting for term life would save you thousands in premiums every year. If you invested that money elsewhere, your money would likely earn much more.

  • Insurance companies aren’t transparent about your premiumsA portion of your monthly payment goes into your cash-value account. But life insurance companies aren’t required to tell you how much.
  • They also don’t have to say what part of your premiums is being paid to the insurance agent who sold you the policy.

    Think about how you budget your money each month. Even if you set aside $400 per month for whole life, you don’t really know where that $400 is going or how much is invested.

  • Whole life insurance isn’t a diversified investmentEven if you’re new to investing, you know that diversification is good. When your money is spread out into multiple investments, it’s more likely to withstand market volatility.
  • Universal Vs Whole Life Insurance

    Whole life insurance is a type of permanent life insurance policy that covers you for your entire life. Like universal life insurance, this type of policy combines the death benefit associated with term life policies with an additional savings component.

    Unlike universal life insurance, whole life policies have fixed monthly premiums, with a certain portion going toward your death benefit and the rest going toward your accumulated cash value. Whole life insurance policies often have more expensive premiums than universal life, although both are significantly more expensive than term life insurance.;

    A universal life plan has an adjustable cash value, and the premium can be adjustable, says David Lewis, a certified financial planner and president of Montlake Capital Management in Texas. This means that if you lose some income in any given month, you have the option of making only your minimum payments and not the full amount. On the other hand, if you have some extra cash, you can put it towards your insurance premiums. Compared to whole life insurance, this feature of universal life insurance offers greater flexibility.

    Universal Life Insurance
    Fixed death benefit

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    Evaluating The Internal Rate Of Return On Life Insurance

    The caveat to Barbara’s strategy, though, is that she remains in poor health. While the policy is scheduled to lapse when she turns 89, the life expectancy of even a health 70 year old woman is only about 16 years, and Barbara’s life expectancy is even shorter, due to her health conditions. If Barbara were to live only 10 more years – paying in $13,500 x 10 = $135,000 more premiums, on top of her current $69,627 of cash value – she’d turn a little over $200,000 of cash value and premiums into a $500,000 death benefit! Over a 10-year time horizon, that’s a whopping 11.8% internal rate of return! Even if Barbara lives to an average life expectancy, the internal rate of return is still 5.1% over the next 16 years. And short of a default of the insurance company itself, those are fixed, guaranteed rates of return ! Given that 10-20 year Treasuries barely yield 2% and even high quality corporate bonds only yield about 4%, these represent remarkably favorable fixed income returns!

    Nonetheless, the bottom line remains: if Barbara doesn’t need the cash value , and can afford to continue paying the premiums, maintaining the life insurance death benefit as a “fixed income substitute” actually turns out to be a remarkably appealing fixed income investment to maintain for the rest of her life… even if the reality is that the return will only accrue to her beneficiaries and not herself.

    How Does It Work As An Investment

    Whole Life Insurance is a Bad Deal

    While whole life insurance policies act as an investment vehicle of sorts because of the cash value they accrue, you shouldnt view any type of life insurance as an investment. True investments are heavily regulated and have safeguards in place to protect investors. While life insurance is also heavily regulated, its regulations have little to do with the financial sector.

    Rather, you should view whole life insurance as a safeguard that protects your loved ones from experiencing a financial burden when you pass. The death benefit can help ensure they dont have to dip into their savings or investments to handle your final arrangements.

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    Reason #: There Are Plenty Of Other Options Available

    Whole life insurance might be more attractive as an investment if there werent so many other good options available.

    Many people have a 401 or other retirement plan with their employer. Just about everyone has the option of contributing to an IRA. Then there are regular taxable accounts. All of these options allow you to choose your investments, control your costs , diversify, and avoid the downsides of whole life insurance weve just gone over.

    And if youre worried about some day wanting the permanent life insurance coverage, know that any good term insurance policy will allow you to convert some or all of it to whole life at any point during the life of the policy. This means that you can save money now by buying term, but still have the option open to get some permanent coverage later. There is no need to lock yourself in now.

    Is Whole Life Insurance Worth It

    Whole life insurance is worth buying for many people. While its typically more expensive than term life insurance, as long as your premiums are paid, it offers permanent coverage with premiums that never change regardless of your health or age. It also builds cash value over time, giving you the opportunity to take out a loan from your policy to pay for medical bills or other expenses.

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    Why Rent A Policy When You Could Own It

    Insurance agents sometimes compare buying permanent life insurance to building equity in a home, but this doesnt make any sense. The choice to rent or buy a home is completely different because you always need a place to live. Whereas, your need for life insurance disappears at the end of a term policy when you no longer have dependents relying on your income should you succumb prematurely.

    More importantly, the cost of renting versus owning an insurance policy is drastically higher;than the long-term difference in renting versus owning a home.;Building equity in a home isnt the best way to accumulate wealth in the first place;and building wealth inside a permanent insurance policy is worse.

    Investing the cost savings from buying a term policy versus a permanent policy is a far superior method for accumulating wealth. In addition, you can access your investments or savings without the restrictions that come with taking a loan on a permanent insurance policy. That brings me to the next one-liner.

    The Top 5 Reasons Why Whole Life Insurance Is Bad

    Why Term Life Insurance is Better Than Whole Life Insurance

    Here are the top fiveor bottom five depending on how you see it:

    ;1.; Whole Life Insurance is front-loaded

    This is probably one of the most annoying statements that people make about why whole life insurance is bad. But why is that? Well, primarily because it doesnt really make any sense.

    What does it even mean?

    Well have to speculate a bit on that as its tough to know with 100% certainty but what we think they mean is that when you buy whole life insurance, all the expenses are loaded up at the start of a new policy.

    Okay, lets play the devils advocate

    Youre right, all the expenses are loaded at policy inception.

    Our follow-up question

    Why does that matter?

    Think about this for a minutenearly any asset worth owning that has the potential to create wealth in the future, comes with some acquisition cost or transaction cost. For example, the darling of the personal finance industry, real estate.

    Ever studied a closing statement and done the math on what the true cost of buying that rental property or even your personal residence is? There is a list of expenses that add no value to the property you just purchased.

    Now, that doesnt make the front-loading of expenses bad, does it? Just the way most asset purchases function.

    Again, none of those costs/expenses make buying real estate bad any more than they make buying whole life insurance bad.

    2.;; They keep your money when you die

    a. the particulars of the policy you purchased

    Yeah, thats the case here.

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