Whole Life Insurance Pros and Cons

Whole life insurance offers financial security for your loved ones and a cash value benefit. But you'll also face a bigger price tag and some risk. So is whole life insurance worth it?

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What Is Whole Life Insurance?

Whole life insurance provides lifelong coverage with a guaranteed death benefit payout. It also includes an investment and cash value component.

When you pay your premiums, some of the money pays the actual cost of the coverage, including administrative and policy fees. The rest goes towards a cash value account - an investment vehicle that grows at a guaranteed rate over time.

You can use the cash value to help save for retirement or even take out loans against the policy throughout your life.

Reasons to consider a whole life insurance policy:

• To provide money to your heirs for estate taxes.

• If you have lifelong dependents such as a child with special needs.

• If you want to spend retirement savings but still leave an inheritance for your beneficiaries.

Pros of Whole Life Insurance

• Fixed Premiums for Life
  Even as you age and your health status changes, you will not pay more for your policy.

• Guaranteed Investment Return
  Whole life cash accounts pay around 5% - 6% interest (before fees).

• Cash Value
  You can access the cash value through withdrawals for retirement, emergency funds, or other bills. If you surrender the policy (aka stop paying premiums), any built-up cash value will be returned to you.

• Guaranteed Death Benefit
  Your beneficiary will receive the death benefit no matter when you die, as long as you've stayed current on your premium payments. Term policies have a two-year waiting period before the death benefit will pay out.

Cons of Whole Life Insurance

• High Monthly Premiums
  You'll pay more since the insurance company takes on more risk with this lifelong policy. This is different than term policies, where the policyholder almost always outlives the term.

• Long Wait for Returns
  Because of the way policies are written and the low interest return rate, it could be more than 10 years before you see a return.

• Lack of Control
  The investment is determined by the insurance company, which means it may not provie the best options for you. When you invest on your own, you can decide where you invest the money (stocks, bonds, investment funds, etc.).

• Complicated Policies
  The fine print make this type of policy confusing and difficult to understand. You'll probably need a life insurance agent, who may charge higher commission fees.

How much do whole life policies cost? Find out below.

Average Whole Policy Rates

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Several factors affect your whole life insurance monthly premiums:

When you apply for coverage, the insurance company will determine the risk they take on by approving your policy purchase.

• The Higher Your Risk, the more likely that you will die before paying the full coverage amount. This means your monthly premium will be higher.

• The Lower Your Risk, the more likely it is you will pay off your full coverage. This will lower your premium.

The charts below show an average monthly cost for a whole life policy. They are sorted by male or female based on a generally healthy, non-smoker.

Whole Life Insurance - Male (Monthly)

Whole Life Insurance - Female (Monthly)

Who Should Consider Whole Life Insurance?

Young, Wealthy Individuals with Families
Whole life insurance can be beneficial for estate planning since the death benefit can pay estate taxes. The inheritance can also be passed to the beneficiaries.

Parents of a Child with a Disability
A whole policy provides a guaranteed death benefit, which can be given to the child (or their caregiver) after you pass away.

People Planning to Spend Their Retirement Savings
Whole life coverage ensures you still have something to leave to your beneficiaries.

Keep reading for some common life insurance mistakes to avoid.

Common Life Insurance Mistakes

Life insurance is complex, with a variety of options available. Be sure to avoid these mistakes when choosing coverage:

1. Not understanding your options.
   In addition to term and whole life insurance, there is also universal and variable universal. You can also add riders, or optional additional coverage, to your policy.

   Talk to a life insurance professional to educate yourself. Each type of policy is suited for different needs. Understanding your options is key to making the right decision.

2. Rushing into a purchase.
   Some people who find quotes online or speak with an agent feel pressured to make a purchase that may not be right for them. This often happens when they don't research ahead of time.

   Make sure you and your agent take the time to understand your life insurance needs and what type of policy and coverage amount is best for you.

3. Not knowing the types of agents.
   There are two main types of life insurance agents. Each type has different expertise. Consider which would best serve your needs:
   • Captive Agents
     Work for one insurance company. They are required to meet certain policy sales quotas for that company. As such, they are not able to offer quotes from different companies to find you the best premium options. Their company also might not offer the type of policy or specific coverage you need.

   • Independent Agents
     These agents typically own their own business and represent several insurance companies, or carriers. They can quote different carriers and sell products that are best for you and your budget. These agents often have a deeper understanding of the market and products are available to you.
     You Should Know: Independent Agents likely will not push a certain product or company on you just because they work for them. You may find it easier to work with one of them.
     

4. Mistake: Naming a percentage of the benefit vs. dollar amount.
   This is particularly significant if you have a whole or universal policy that grows in cash value over time. Say you have a $100,000 Whole life policy and designate $50,000 to each of your children. But when you pass away, the policy has grown by $15,000.

   Since you only designated $100,000 of that now $115,000, the insurance company won't know what to do with the remaining $15,000. There may even be legal challenges. It would be better to designate 50% to each child instead of a set dollar amount.

Read on to learn about other types of life insurance.

Whole Life Insurance Alternatives

Term Life Insurance
This coverage is cheaper because it's temporary. In fact, most term policies don't actually give a payout because policyholders live to the end of the term.

You'll want to choose a term life policy if:

• You only need life insurance to replace your income over a certain period. This may include the years you're raising your children or have an outstanding mortgage.

• You want a simpler, more affordable policy.

Universal Life Insurance
This provides a permanent death benefit and has added cash value. Part of your monthly premium goes into a cash account that earns interest. The rest goes towards paying the death benefit.

Your premiums are not fixed—the amount you pay can change month-to-month. But you have more control and access to the dollars that go into the cash account.

Variable Life Insurance
As with universal life, part of your premium is contributed to a cash account. But with variable life, the cash value can be invested in a variety of different accounts, similar to mutual funds.

You choose the accounts to invest in. These include:

• Stocks
  
• Bonds
  
• Equity funds
  
• Money market

Why Do I Need Life Insurance?

The primary purpose of life insurance is to provide for your family with when you die. Without it, certain expenses—and debts—fall onto your family. The total can add up quickly, possibly to hundreds of thousands of dollars.

Your policy and death benefit can keep your loved ones from having to tap into savings, take out loans, or struggle financially once you are gone.

First, life insurance will go towards end-of-life costs. This includes medical bills and funeral expenses.

With a whole life policy, the remaining death benefit will likely used for estate taxes or given to your beneficiaries as an inheritance.

With a term life policy, what remains of the death benefit can be used for:

• Student Loans
  The average amount of student loan debt is between $28,000 and $40,000, depending on what year you graduated. In 2017, over 44 million Americans collectively owed nearly $1.5 trillion in student loan debt.

• Credit Card Debt
  The average American has a credit balance of nearly $6,500, according to Experian's annual study on the state of credit and debit.

• Mortgages
  The price of your house, total of your down payment, your loan program, and loan interest rate affect your monthly mortgage. But the average monthly rate is about $1,500 (for a total of $18,000 per year).

• Maintaining or Purchasing a Home
  The median cost of a new house is $322,637.

• Sending Children to College
  Average cost of tuition for private colleges is $34,740 per year, for in-state public colleges $9,970 per year, and for out-of-state public colleges $25,620 per year.

• Buying a New Car
  Average cost of a new car in 2019 is $34,000.

• Paying Medical Bills
  Monthly premium for a family health insurance plan averages $1,168.

• Childcare
  If your spouse or partner has to go back to work or continue working, it could cost $10,000 or more per year for just one child.

  If you have young children when you pass, your partner will likely have to either hire childcare or become a stay-at-home parent. This can total hundreds of thousands of dollars throughout the life of the child.

How Do I Determine What Type of Coverage Is Right for Me?

Here's a simple way to calculate your potential coverage amount:

1. Consider how many years you need coverage and multiply your annual income by that number of years.

   For example, if you want a 10-year term policy and earn $60,000 per year, you'll want a minimum $600,000 policy.

2. Think about other financial obligations you want your policy to cover
   This can include:
   • Funeral costs
     
   • Mortgages
     
   • Student loans
     
   • Credit card debt
     
   • Medical bills
     
   • Childcare costs

   Or, if you are considering a whole policy, think about how much inheritance you'd like to leave your beneficiaries.

   Add these totals to the sum found in Part 1

3. Determine what services you provide that would need to be replaced
   This is particularly important if you are a stay-at-home parent and your partner wouldn't be able to quit their job to provide the services you do.

   Add the replacement cost to Parts 1 and 2.

4. Do you have any savings or life insurance through a current employer?
   Most companies offer a life insurance policy for full-time employees. But they usually provide only 1-3 times your current salary.

   It's likely the coverage isn't enough for what you'll need. Also, if you leave that job, you lose the coverage.

   Subtract those totals from your determined policy amount.

Once you've done the math, you should have a better idea of the coverage you need. But how do you find the best rates? Read on.

How to Get the Best Rate

A number of factors go into determining your monthly premium. These include: your age, sex, health status, occupation, and hobbies.

Here are a few tips for getting the best rate possible:

• Don't Wait to Get a Policy
  Because age and health are such important factors, make sure you take advantage of that and apply for a policy when you are most likely to get the best rate.

• Get Quotes from Several Companies
  Each insurance company offers different types of policies, benefits, and coverage.

  Know what companies offer what you need. Getting multiple quotes allows you to see a variety of premium options so you can choose one that fits your budget.

• Talk to or Work with an Insurance Agent
  They are able to assist you with your research and the quoting process.

  Because they are the insurance product and company experts, they likely know what company and/or policy fits your needs best with the best rate.

Top Life Insurance Companies

With more than 800 life insurance companies operating in the U.S., you have an overwhelming number of options to choose from.

Here's a list of our Top 10 companies are ranked based on:

• Products Available
  We looked at what types of policies were available (term, whole, universal, variable) and how many options there were. We also reviewed other features, like Additional Riders, that offer more options to consumers.

• Customer Service Ratings
  We used J.D. Power Insurance Ratings to determine which companies were ranked highest in customer service. Ratings are based on the opinions of sample consumers who have used or owned a product or service being rated.

• Price
  Quotes were gathered for a 35-year-old male and female in good health, non-smoker, for a $250,000, 20-year term policy.

  Male was 6'0", 200 lbs. and female was 5'7", 175 lbs. We also use J.D. Power ratings and reported cost on each company's website.

• Financial Strength and Insurance Ratings
  For each company listed, we analyzed the financial strength reported by each company. We also looked at the scores reported on by A.M. Best, Moody's, Standard & Poor's, and Fitch.

  Top 10 Life Insurance Companies

  Company	A.M Best	Moody's	S & P	Fitch
  New York Life	A++	AAA	AA+	AAA
  Northwestern Mutual	A++	AAA	AA+	AAA
  Protective	A+	A1	AA-	A+
  Mutual of Omaha	A+	A1	A-	N/A
  Prudential	A+	A1	AA-	A+
  American National	A	N/A	A	N/A
  Assurity	A-	N/A	N/A	N/A
  Transamerica	A+	A1	A-	A+
  Foresters	A	N/A	N/A	N/A
  Lincoln	A+	A1	A-	A+

  For more detail on these companies, and our runner-ups, check out our Top 10 Life Insurance Companies here.

  Bottom Line

  A whole life insurance policy offers an investment, a cash value component, and a guaranteed level premium for life. But this type of policy is not for everyone.

  Premiums for a whole policy are much higher than other types. Before choosing a whole life policy, talk to a life insurance agent.

  You can find a local agent by searching online. If you prefer a particular life insurance company, call their customer service or request for a quote on their website.