By Vincent Barbera, CFP®, MSFS
When you did your due diligence and bought a life insurance policy, you had a whole slew of options from which to choose. Not only did you need to educate yourself on the differences between term, convertible term, and whole life insurance, but you also had to shop around and decide where to get your policy from. You made the best decision for you and your family at the time and obtained a whole life insurance policy.
But now you may be wondering, “Is this still the best option? Are the high premiums worth it? Could I get better coverage through a different product?” Let’s break down how a whole life policy works so you can determine whether or not it is still right for you.
Whole life insurance, also called permanent life insurance, guarantees that your premiums (paid monthly or annually) will stay at the same rate for the rest of your life or for as long as you hold onto the policy, as opposed to term life policies, in which the premiums are only guaranteed for a set policy period (10-, 20-, or 30-year options). However, premiums for whole life policies are typically higher than those of term life, possibly 6 to 10 times higher.
As you reevaluate your life insurance, you should ask yourself whether the extraordinarily high premiums are worth taking up that much of your budget. Even if you’re drawn to the idea of a life insurance policy that never expires, keep in mind that the cost of this type of insurance could actually prevent you from having the lifelong coverage you desire, since 45% of whole life insurance policies are abandoned within 10 years. (1)
The Policy Structure
This is the crux of the whole life insurance model. The reason why the premiums are higher for whole life policies is that a portion of the premiums goes into a savings account created by your insurance company. The money in this account is guaranteed to grow at a slow and steady pace, as opposed to the market, which can rise up and down with gains or losses at a much faster rate. Contrary to what many people think, this savings account is not meant to be additional income outside of the policy benefit amount. It is actually meant to provide cash value to pay off the premium and provide for the benefit amount, as this policy is intended to last for more than 30 years. This is why the premiums of whole life policies are guaranteed for the entirety of your lifetime.
But here’s the issue. Just like when you pay off your mortgage, you pay very little into the savings account feature in the first years of your policy, which means that if you decide the high premiums aren’t worth it and cancel your policy early on, you won’t see the money you hoped for. Not to mention, the returns on the money you invest will probably underwhelm you. Consumer Reports estimates that most policyholders will see returns of 1.5 percent for the whole life guaranteed cash value, 2.2 percent for the Treasuries, and 3.5 percent for the whole life possible cash value. (2) High fees and inflation don’t make this an enticing option, despite what you may hear.
The Benefit Amount
The benefit amount, also known as the death benefit, is what your policy is worth in dollar value and what your family will receive after your passing. Whole life, term life, and indexed universal life all have different benefit amounts to choose from, with options anywhere from a $50,000 policy to well over $1,000,000.
If what you’re most concerned about is taking care of your family when you’re gone, you have a couple of options that might be better alternatives than whole life insurance. For example, a 40-year-old male in excellent health who wants a $500,000 death benefit is looking at a monthly premium of $651.63. (3) Compare that to $51 a month for the same death benefit with a 30-year term life insurance policy. (4) And yes, term life insurance won’t last you until you’re 100, but think of what you could do with that extra $600 a month for all those years. Could you put it to better use by investing it in a tax-advantaged savings account like a Roth IRA, or maybe use it to beef up your 401(k) or your children’s college savings fund?
Where Do You Go From Here?
When choosing a life insurance policy, be sure to educate yourself on who and what you need to protect and how much money you will need to do just that. Once you’ve gathered all pertinent information, reach out to different life insurance companies and compare their monthly/annual premiums to the benefit options offered, both for term life or whole life insurance policies. Then see how the quoted premiums fit into your budget and make a decision that makes sense for your family.
If you currently have a whole life policy, it’s worth another look to make sure your money is working for you. If you want help evaluating your life insurance policy and coverage or want to know more about protecting your assets, we’d love to be your objective source of advice. We do not sell insurance and will only recommend products that are in your best interest. Contact Newbridge Wealth Management with any questions by scheduling a free 15-minute introductory phone call, emailing firstname.lastname@example.org, or calling 610.727.3960.
Vincent R. Barbera, CFP®, MSFS is a managing partner and co-founder of Newbridge Wealth Management, a private financial counseling firm located in Berwyn, Pennsylvania. Believing in a patient, disciplined approach to investment management that delivers value and peace of mind, he utilizes a process-driven approach to financial planning that provides comfort and clarity to his clients’ long-term goals. Along with a bachelor’s degree in psychology and business, he has a master’s degree in business and financial planning and Certified Financial Planner™ designation. Learn more by connecting with Vincent on LinkedIn, or send him questions at email@example.com.