Buying whole life insurance can be confusing. Deciding whether or not a whole life policy is right for you can be challenging. Here are some things to consider before you buy.
Whole life and its close cousins universal life insurance and variable life are life insurance policies that are connected with investment products. They are often called “cash value” life insurance policies because, unlike “term” life insurance, they accumulate cash value on a tax-deferred basis.
Whole life policies are expensive
A whole life policy costs much more than a term life insurance policy for younger, healthy people.
Insurance commissions are high
Most insurance policies pay higher commissions than you’d pay to buy shares of stock or shares in a mutual fund. Because whole life policies are much more expensive, your insurance agent will earn a higher commission for selling you a whole life policy than a term policy. As a result, she’ll likely be well prepared to explain the benefits of the more expensive policy at length. Do your homework before you buy.
You can pair investments and term insurance
You can easily choose to buy term insurance with guaranteed renewal and pair that with mutual fund investments made with the savings. In all likelihood, you’ll end up with more money.
Whole life insurance is permanent
Unlike term insurance, whole life premiums never go up. Term insurance policies are usually locked in for 10 or 20 years, but thereafter the renewals can be costly — prohibitively so. If you live long enough, the cash value of the whole life policy may be great enough to pay the premiums for you, meaning that you can keep the insurance, preserve the value of the investment and pay nothing each year for the privilege.
Wealthy individuals wisely use whole life policies
Despite the apparent costs, many wealthy individuals use whole life policies as part of a broader intergenerational wealth preservation strategy.
Universal life is adjustable
Universal life policies are whole life policies that are adjustable as you go through life, allowing you to add additional coverage. They also pay floating rates of interest on the investment side.
Variable life offers more investment options
Variable life policies allow you to choose more investment options with the potential for higher returns over the long haul. If you choose this option, be prepared to stay the course for life. Poor returns in the early years are possible, but don’t necessarily mean that you won’t come out on top in the long run.
Know why you’re buying insurance
It is important for you to know why you are buying life insurance. You likely need much more coverage before your children finish college when expenses are high, and your accumulated assets and home equity are modest. Later in life, your income may be higher, but so are your assets. With the kids out of college, you may not have nearly the same need for insurance that you once did.
Seek advice from a professional who won’t make a commission
Many of the advisors whom you may approach for counsel in this regard have a commission hanging in the balance. Your stock broker will discourage a whole life policy so that she can have that money to invest for you in the stock market. Seek out a financial advisor or CPA who doesn’t have an investment product to sell and get advice from her before you make a final decision.
Life insurance is a vital part of a healthy financial situation. Choosing the right policy for your situation can be a challenge. Take the time to get educated before you make a lifelong commitment to purchase whole life insurance.