Why Whole Life Insurance is a Bad Investment

Is life insurance really a waste of money? It depends. Find out why life insurance (and specifically whole life) might be a bad investment.

In general, a term life policy is the better "investment". The rates are a small price to pay for the impact a payout could have on your family.

Whole life (and the investment account it comes with) is a harder sell. It costs 15x more, the cash value grows slowly, and it's hard to say where your premiums are going.

Still, whole life could be a surprisingly decent option for a select group of people. Here's why it might be considered a bad investment, and who should look past the critiques.

Is Life Insurance a Waste of Money?

The short answer? Yes and no. What might be good for you could be bad for someone else.

But if you're looking for a general takeaway for term and whole life insurance, here's what you need to know.

Term life insurance
Generally, term life is less likely to be a waste of money. It's more affordable and can be customized to your specific needs.

Healthy adults can easily get 20-30 years of coverage for the price of a monthly takeout dinner. If you die during the term, the value of that money to your family is priceless.

Whole life insurance
Whole life is more likely to be a waste of money. It costs up to 15x as much as a term life policy. Plus, the investment account offers low returns at a slow pace.

If you're set on being insured for the rest of your life, it might be ok to overlook the flaws of whole life insurance. But there are some big drawbacks you should consider.

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.

1. The returns are low and slow
   Insurance 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.

2. Insurance companies aren't transparent about your premiums
   A 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.

3. Whole life insurance isn't a diversified investment
   Even 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.

   The investment account that comes with whole life is not diversified. In fact, it's not really invested at all. It's kept with the company, which doles out returns from its own investments into your account.

   This is like having your money sit in a savings account. Don't invest in whole life insurance if you're expecting big returns.

With all that in mind, there are still a few reasons why whole life could be right for you.

When Whole Life Might Be Worth It

Whole life is worth it for people who check some specific boxes.

If all of the following apply to you, you might consider a whole life policy.

• You're young and wealthy
  If you're 30 or younger, the cash value in a whole life policy has more time to make it worth the price.

  Plus, wealthy adults are better suited to pay the pricey premiums.

• You already have a large, diversified retirement account
  Ideally, you already have maxed out retirement accounts and diversified investments elsewhere.

  If you're not buying life insurance for the "investment" factor, it could be worth it for lifelong coverage.

• You really, really struggle with saving regularly
  Whole life really acts as a forced, automatic savings account. With every premium, some money is put into the account and grows at a slow pace.

  If you find it hard to save money (and check the other two boxes above), whole life might work for you.

Bottom Line

In general, a term life policy is a much better "investment". It can cover you for as many years as your family depends on your income. The money you save by not choosing whole life can be put into more lucrative investments.

Ultimately, though, life insurance is a very personal decision. If you absolutely need lifelong coverage, already have healthy investments, and can afford the premiums, look into whole life.