Whole life insurance may be a pricier option than term life insurance, but that doesnt necessarily mean you shouldnt buy it. Unlike a term policy, a whole life insurance policy provides a lifetime of coverage at a level premium – meaning youll pay the same monthly or annual rate for the life of the policy. Whole life coverage also accumulates a cash value, which can grow over the life of the policy and receive favorable tax treatment. This means you can borrow against or even cancel your policy for all or part of its cash value while youre still alive. And because you cant outlive a whole life policy, this type of coverage is often considered preferable to term life insurance when it comes to retirement and estate planning. Given the high cost of whole life insurance, however, it pays to carefully consider these five questions before you purchase a policy:
- Can you afford the premiums? Because whole life policies provide a lifetime of coverage and generate cash value, the premiums are much higher than those for term life insurance. How much higher? Typically, seven to ten times the cost of a 20-year term life policy. You can usually get a discount for paying your premium on an annual basis as opposed to paying monthly, but that doesnt change the fact that you may be spending thousands – if not tens of thousands – a year for the rest of your life. These seemingly prohibitive costs can (and often do) prevent people from buying as much whole life insurance as they really need. And while the dividends from your policy may be able to cover the cost of your premiums after a decade or two, those dividends arent free. If youre using them to pay your premiums, the cash value and death benefit of your policy wont grow as quickly as they otherwise would.
- Do you understand the fine print? Whole life insurance is considerably more complicated than term life insurance. The relationships between premiums, cash values, credited interest rates, and other aspects of a whole life policy are integral to its design, and not necessarily obvious to the consumer. If not explained properly, these relationships can cause confusion or an unpleasant surprise once the policy is in place. Thats why the purchasing process requires far more research, planning and professional assistance than shopping for a term life policy. Speaking of professional assistance, be sure to consult with an impartial financial professional – i.e., one who does NOT sell whole life insurance – before you decide to buy. Many people who purchase whole life insurance never talk to anyone about it other than the agent who sells them their policy. Dont make the same mistake.
- Have you maximized all of your tax-advantaged accounts? Purchasing whole life insurance prior to maximizing all of your tax-advantaged savings accounts can be a big mistake. For example, some people choose to purchase a whole life insurance policy and treat it as an extra, tax-free retirement account. But it makes little sense to do so when you havent even maxed out a personal or spousal Roth IRA, which have no insurance costs whatsoever. Tax-advantaged savings accounts include:
- 401(k) plans
- 403(b) plans
- Profit-sharing plans
- Roth IRAs
- 457 plans
- Defined benefit or cash balance plans
- 529 plans
- UGMA or UTMA custodial accounts
If your insurance agent or financial consultant recommends that you purchase a whole life policy instead of using one (or all) of these accounts, be afraid – be very afraid.
- Do you really need a permanent death benefit? While a term life policy with an impermanent death benefit is sufficient for most insurance needs, there are situations where a whole life policy with a permanent death benefit is required. One example would be real estate (such as a family farm) that cannot be easily liquidated in order to pay off estate taxes – or to be split among several beneficiaries. Another example might be having a disabled or chronically ill child who will always be dependent on your income. There are also plenty of business applications for a permanent death benefit, such as insuring the life of a partner so you have the money to buy out that partners heirs in the event of his or her death.
- Have you called your SelectQuote Advisor? How many houses, condos or apartments did you look at before you bought your home? Given that youre likely to spend more on whole life insurance than you did on your residence, its a good idea to look at multiple polices before you commit to buying one – and your SelectQuote Advisor is uniquely position to do that for you in one call: 1-800-281-3907. By comparison shopping whole life products, youll see what your options are in terms of price, death benefit and insurance company ratings. All of SelectQuotes highly rated companies offer permanent life insurance products at competitive rates. Moreover, term life policies sold through SelectQuote can be converted to permanent insurance without requiring a physical exam. If you are considering permanent insurance, please call 1-800-281-3907.
To avoid the high premiums and other downsides of investing in a whole life policy, SelectQuote generally recommends buying term life insurance and investing the difference between term and whole life insurance premiums. To find out more from one of our personal agents, click here or call 1-800-281-3907.