All Articles/Financial Planning/Pros and Cons of Whole Life Insurance

Pros and Cons of Whole Life Insurance

Analyzing the options that life insurance offers as part of an investment portfolio.

When beginning the process of financial planning, people almost instinctively focus on their investment portfolios first. Stocks, in particular, draw attention, as they seem to be the most glamorous and prominent element of one’s financial life.

Meanwhile, other key elements of a good financial plan, such as life insurance, often remain afterthoughts. Advisors say insurance should be among list of considerations when people evaluate the total picture.

“Like any other financial planning tool, life insurance, whether term or whole life, can be used to fulfill various planning goals,” says Frank Pare, president of PF Wealth Management Group in Oakland, California.

He says life insurance, just like an investment portfolio, should be viewed as one more arrow in the planning quiver.

Learn the language. Insurance products and terminologies may be confusing, just as in the investing world. Once a person understands the need for life insurance, the next step is to wade through the different types of policies, then decide whether term or permanent insurance is the best fit.

“Term life insurance should be used to cover risks over a certain period of time,” says Jeff Root, founder of the Rootfin Life Insurance Agency in Austin, Texas.

“The most common examples include to replace your income until you retire, cover the remaining years on that 30-year mortgage or get the kids through college. Once those risks are off the table, you don’t need that coverage anymore,” Root says.

Permanent life insurance should be used for situations including estate planning, leaving a legacy, transitioning ownership of a business and covering burial expenses.

“One obvious benefit of purchasing term life insurance is the fact that it is usually less expensive than whole life insurance,” Pare says. “The downside, however, is that there is a pretty good chance you will outlive the policy itself.”

Once the term expires, the term policy may be renewed annually.

“Premiums increase significantly starting in year one and each year thereafter, to the point that it’s generally best to allow the policy to lapse once the term is complete. The chances of your heirs actually benefiting from the term life policy are slim,” he says.

Another type of coverage. Whole life is generally more expensive than term.

“The amount of face value, or death benefit, might be less than term because of premium costs,” Pare says. “The primary difference, however, is that whole life can allow for a buildup of cash value and if held long enough can increase in value and face amount. The increase in cash value and face amount is usually tied to premium payments, as well as dividends and interest paid on the cash value.”

Pare says that life insurance, in general, is often confusing because whole-life policies can be offered in various forms by different insurance companies. A policy owner may customize coverage by purchasing an additional provision, called a rider, that offers further coverage.

“Whether a person wants guaranteed premiums and payout, flexibility in paying premiums or potential market exposure, there is a whole life policy and with even-more-confusing riders to go with them,” Pare says.

Life-insurance buyers may wonder whether there is any investment value to their policies. As with many financial topics, Americans may hear conflicting advice on this matter.

“Beyond a need for a death benefit, permanent life insurance can provide many living benefits as well,” says Stephen Stricklin, founder of Wise Wealth in Lees Summit, Missouri.

“Depending on how the permanent life insurance policy is designed, it could provide a source of tax-free income in the future. Besides Roth IRA’s, the only other real source of tax-free income are specially designed life insurance policies. The other benefit of cash value life insurance is that there are products that you can use inside of the policy that can protect the cash value against any market loss,” Stricklin says.

Value as an investment. Root says a correctly structured policy has value as an investment, though he also says the primary advantage of life insurance is its death benefit.

“It may be a good option if you want a more reliable investment with a lower rate of return. It’s more of a protection tool with a savings-like component. In the vast majority of instances, it should be purchased to protect against an unexpected death,” Root says.

Pare says an insurance product should fit into one’s overall financial plan.

“The key is not to rely on life insurance in general or one particular type of life insurance specifically to solve all financial planning needs from the point of sale onward,” Pare says. “In other words, the intent is not to have life insurance serve as the ‘silver bullet’ for planning needs, but to serve as one tool among many to help people achieve their living as well as legacy goals.”

About the Author

Better Money Decisions

Start Making Better Financial Decisions Today

Sign up for FREE and get these reports sent to your inbox:

5 Serious Mistakes To Avoid In Retirement

Pursuing A Better Investment Experience

The 10 Steps Every Smart Woman Must Take to Ensure Her Money Lasts In Retirement