So you're wondering whether to get whole life insurance even though it costs much more than term life insurance. Our partner Policygenius shares the main reasons to get whole life insurance. You can get real insurance quotes all in one place with Policygenius.
Whole life insurance is permanent coverage that lasts your entire life. If you have strong disposable income and are looking for extra ways to invest, it can double as financial protection for your family and a low-risk savings or investing vehicle throughout your life.
Here’s how whole life insurance works. In exchange for premiums, your insurance company pays out a tax-free death benefit to your loved ones when you die. Most whole life insurance policies also include a cash value savings component. This comes with added financial benefits you can use throughout your life.
Whole life insurance is not the most popular type of life insurance. Term life insurance is usually the better choice for most people due to its simplicity and affordability. However, it's helpful to learn about the circumstances that can make whole life insurance a better choice.
Whole Life Insurance Quick Facts
When You May Want To Get Whole Life Insurance
Below are the circumstances where getting while life insurance instead of term life insurance may be more appropriate.
1) You’re a high-net-worth individual with a large estate
When your estate exceeds $12.92 million per person or $25.84 million for married couples in 2023, you have to pay the federal estate tax when you die. The tax rate will likely be 40%. The exemption amount is lower in some states and Washington D.C.
“Estate taxes eat away at what you can give to your children when you’re gone,” says Policygenius Sales Operations Manager Anthony He. Instead of your heirs paying that tax out-of-pocket, you can set up a whole life insurance policy that can be used to pay the estate taxes when you’re gone.
Beyond funding estate taxes, high-net-worth individuals can use a whole life insurance policy to transfer wealth without increasing their taxable estate. In other words, your whole life insurance benefit can go directly to your beneficiaries (tax-free) without the added stress or complication of probate or other legalities.
2) You’re saving for retirement and maxed out other accounts
High-net-worth individuals who have maxed out retirement savings due to 401(k) and IRA income caps can also benefit from a whole life insurance policy.
Whole life insurance should never be your primary retirement savings vehicle. But, it can supplement a robust retirement plan if you’ve maxed out other options. Whole life is a low-risk alternative to add more to your savings and accumulate tax-deferred growth.
A whole life insurance policy’s cash value grows steadily over time, typically at a lower rate than investments in the stock market or mutual funds. These lower interest rates (returns) may seem like a negative. But, they can be more stable and less volatile than the cash investments for your 401(k) or other retirement accounts.
If you retire and the market is having a down year, pulling out cash from your whole life policy can be a decent alternative.
3) You’re a parent buying life insurance for your children
Parents with tremendous disposable income can consider buying whole life insurance for their kids. It's a similar idea to opening up a custodial Roth IRA or making any investment while your children are still young. A whole life policy with a cash value component will have a greater amount of time to compound.
“Whole life insurance for children is like a financial head start. When a child eventually becomes financially independent, the parents can transfer ownership of the policy along with any accumulated cash,” He adds.
Two major benefits to buying whole life insurance for your child are time and money. While it takes a long time – sometimes 10 years or more – for the cash value of a whole life policy to accumulate, by purchasing life insurance for your child when they are younger, time is on their side.
The policy will have compounded interest by the time they finish school compared to a policy purchased later in their life. Once the cash value accumulates, your child can take out a policy loan against it. Or they can use the reserves to pay premiums, or surrender the policy for cash if they no longer need it.
Life insurance prices increase as we age. “Whole life insurance is an afterthought if purchased too late,” He says. Purchasing life insurance for a young child locks in a lower price for a permanent policy. It won’t get more expensive over time.
Related: Top Life Insurance Myths Debunked
4) You’re a caretaker of a lifelong dependent
If you care for an aging parent, adult, or a child with a disability who needs lifelong financial support, whole life insurance can be a great option because it will never expire. Roughly 15% of the world's population has some sort of disability.
By naming your dependent, a trust, or another caretaker as the beneficiary, you can ensure your loved one gets the support they need. Naming a trust or caretaker as your whole life policy beneficiary is best if your dependent is unable to manage their own finances. Or if your child is under the age of majority in your state, which can complicate the payout process.
5) You own a business with a buy-sell agreement
Key person insurance is life insurance for an executive member of a business. The business is the beneficiary and pays the premiums. Key person insurance is recommended for business owners, CEOs, and business partners whose deaths would negatively impact their businesses.
To fortify this type of life insurance, buy-sell agreements are a must for business owners and partners. This type of agreement sets the price, conditions and terms for any remaining business partners to buy the deceased (or exiting) partner’s shares if anything happens to them.
A whole life insurance policy can be used to fund a buy-sell agreement. This allows the remaining business stakeholders or partners (including surviving family members unrelated to the business operations) to use the death benefit to purchase remaining shares upon the death of the insured and avoids the use of out-of-pocket cash.
This type of policy can get complicated. It should be set up in coordination with a professional financial planner and your licensed life insurance agent.
6) You’re an adult with disabilities
A whole life policy is also a good option for adults who have a disability or medical condition that is likely to worsen with age. This is especially true if you know you’ll have financial dependents into retirement and beyond. Whole life insurance ensures lifelong coverage and stable premiums regardless of advanced medical needs.
If you have or are expecting a child with significant disabilities, a whole life insurance policy might be vital. Some children require care for the rest of their lives and it can get very costly.
As a parent to two children, I know there is this growing anxiety about our children's futures. The world is hyper-competitive thanks to technology and globalization. Even if your kids are best high school students, they still have a tiny chance of getting into a great university. AI could take away many jobs.
One strategy to reduce the angst a parent may be feeling is buying a whole life insurance policy when the child is young. This way, if a parent dies prematurely, the kid gets a financial windfall. And in 20+ years, the cash value of the whole life insurance policy while grow to a significant amount.
7) You want life insurance that never expires
Whole life insurance is great for people who prefer a “set it and forget it” approach to financial planning. And, it avoids the stress of having to go through medical exams and underwriting at an older age. In addition, you can also set up convenient, automatic premiums so you never miss a payment.
For those who have term life insurance policies, you need to keep track of when coverage expires. You can always convert your term life insurance policy to a whole life insurance policy to keep your health rating. However, it is just another process you need to go through.
8) You want more stress and anxiety relief
I realized something important after going through three years of the pandemic with my wife and two children. The more permanent a financial move is, the more impactful it is in reducing stress and anxiety.
For example, let's say you get a 10-year term life insurance policy like I did. The security will feel great for ten years. However, as you edge closer to the expiration date, you will start to worry about the future again. Your life might not have turned out the way you thought.
With a whole life insurance policy, it's permanent. No matter how many kids you have, how much debt you rack up, or whatever type of sickness you get, you'll feel good knowing that your life insurance policy and the rate you first got will always be there for you. The permanence in the policy provides tremendously mental relief so you can focus on living life to the fullest.
Personal Thoughts On Whole Life Insurance
In retrospect, I probably should have gotten a whole life insurance policy when I was 30. 30 is the best age to get life insurance. Back then, I had a lot of disposable income working in finance. Further, I had the highest health rating, which would have locked me in at the lowest premium for life.
If I had gotten a whole life insurance back in 2007, its cash value would have grown tremendously by now. Further, I wouldn't have had to go through the process of finding a new life insurance policy.
In January 2013, before I had two children, I erroneously took out only a 10-year term policy. The idea was to cover me until my primary mortgage was paid off. But I didn't anticipate having two children.
Now that I'm a father who has to think about estate planning, having a whole life insurance policy with a large cash value would have been nice. Alas, I can't change the past.
My 20-year term life insurance policy I just got through Policygenius will have to do. It covers our kids until they turn 22 and 25. After getting the matching policies I felt so much relief. Just the relief we felt alone is worth the premiums. By then, I hope they will have the maturity to build their own wealth.
Save And Invest Regularly For Your Family's Future
I plan to consistently save and invest the difference between the whole life premiums I would have paid and the term life premiums I'm currently paying. Most of the investing will go towards funding both children's 529 plans. The rest will go to real estate.
A term life insurance policy is likely the best solution for most people. However, there are certainly good reasons to get a whole life insurance policy as well.
Finally, if you have a term life insurance policy, you can also consider converting your term life policy to a whole life policy. This way, you get to keep your original health rate class, which will get you a relatively lower premium.
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I think some people miss the reasons why you would be in Whole Life Insurance as It certainly isn’t for everybody. Some of the advantages I have with my policies:
1. Offers another vehicle for estate planning and wealth building over and above the Limits of what the Government allows us to contribute.
2. It functions like a Roth but doesn’t have the income limits a ROTH has, nor the Required Minimum Draws (RMD).
3. The Life Insurance Value should be increasing along with the Cash Value. Example if you start with a Life Insurance Face Value of 1MM in 30 years it should increase in death benefit value every year and should never be less than your cash value. This allows for inflation and increased growth for your beneficiaries’.
4. The Government doesn’t track your Whole Life Insurance value in your taxes and since it is a death benefit it isn’t income taxed when it pays out. Also borrowing against the policy is not income taxed.
5. You can 1035 Exchange (similar to 1031 exchange on real estate) your Policy to another Provider/Policy if you don’t like what is going on with your current provider. This will require you to be able to qualify for new Life Insurance policy at your current age and health condition.
6. Term Insurance can be converted into Whole Life. This can be helpful if you have health issues that would prevent you from renewing or qualifying for new insurance due to a new health problem.
I think some people get into Whole Life Insurance and lack an understanding of what it is and where it shines. This product is not for everyone and can be a very beneficial resource to the right subscriber.
Hey Sam,
Thanks for the article on whole life. I ended up buying a policy earlier this year when I started learning about finance through my MBA classes and personal enrichment. I decided to get a whole life policy for multiple reasons. One reason– I liked the fact that it was disconnected from the stock market, so I pulled my emergency fund out of the stock market and put it into whole life.
It took quite a bit of research and learning until I was comfortable with this idea. My policy was set up for a technique called infinite banking and I’m using it currently as a personal line of credit for debt paydown right now and later for future renovations this next year on my duplex. The loan rate on my policy is currently 5%, below anything offered to me by a lender. Additionally you control the payback date on the loan and interest on the loan is simple rather than compounding. It does take up some of my income every month to continue to pay the premium but the benefits really outweigh the cost. It also takes time for the policy to reach maturity (the cash value is not 100% available for policy loans for the first year).
My pilot application with it was paying off the last of my credit card debt.
Hi Amy,
Being able to sidestep the 2022 bear market is a win! Yes, the steady returns is nice. Hopefully you have a policy that pays out the death benefit and the cash value.
Sam
Cost Comparison: Term vs. Whole Life Insurance
Let’s say we have a friend named Greg who’s in his 30s and wants to secure $250,000 of life insurance for his family. He meets with a whole life insurance agent who pitches a $260-per-month policy that will include the insurance coverage plus build up savings for retirement (which is what a cash value policy is supposed to do).
On the other hand, a term life agent tells Greg he can get a 20-year term with $250,000 of coverage for about $13 per month—that’s a $247 difference compared to whole life.
If Greg goes with the whole life, cash value option, he’ll pay a hefty monthly premium. But it’s because the part of his premium that isn’t insuring him is going toward his cash value “investment,” right? Well, you’d think, but then come the fees and expenses . . .
In truth, the additional $247 per month disappears into commissions and expenses for the first three years. After that, the cash value portion will offer a horrifically low rate of return for his investments (we’re talking 1–3% here!).
But here’s the worst part. Let’s say Greg gets this $250,000 whole life policy at 30 years old. He pays $260 per month, with $15 going to the insurance and the rest into that savings account with a 2% return rate. After 40 years of paying way too much for his insurance, Greg is 70 and has $250,000 in insurance and roughly $180,000 in cash value. Then, Greg dies. How much does the insurance company pay out to his wife and kids? $250,000. But wait, what happened to the $180,000 of Greg’s hard-earned savings? The insurance company keeps it. Sound like a scam? That’s because it is! The only people who are blind to this are the ones selling it.
And that’s IF he has kept up his premiums for 40 years. If anything happens and he doesn’t, the policy lapses and he loses all his “investment” and his family gets nothing.
Take a term policy,invest the difference. If you lack the discipline to do that, whole life can help but for a cost. You’ll pay handsomely to the person selling it.
Hello all,
For me, the way I look at it based on my limited experience, as a 31yr old with no dependents — permanent whole life, dividend paying insurance is and will be my only financial investment and really, way of life I’ll have until I’m dead. Every other asset to me is just a trade.
Every year I’ll pump 25k into my policy. With that 25k I can take a MAX loan on it at 20k and make money off it in various other more risk adverse vehicles. Now, I have two vehicles gaining interest. I’ve done the math and it’s always worth it even with the 4.5% (current) interest rate on the loan I take against my policy. After 7-10 years I’ll stop the 25k deposit as the policy with its expected gains, will now take care of that 25k per annum for life. At which point, perhaps I’ll open another policy on a family member or employee. I expect once I’m 70 I’ll be able to take a loan out each year for 150k, and I’ll never pay it back. The amount of interest it’s made won’t catch up to the death payout, it’ll only get subtracted from the death payout when I die, so perhaps instead of 8 million I’ll pass over when I die at 100, only 4 million instead. I like this retirement platform way better than the more talked about ones. I initially thought this was a scam when I first came across it.
If compounding interest is truly what you’re after then in my opinion there is nothing else that provides more guarantee than permanent whole life dividend paying insurance. The company I’m with has been paying out dividends year over year since 1870. Minimum 4% dividend per year, at maximum 12%. Name another business that has done that. The double compounding effect is what I’m after. The tax free payout when I die is only a bonus. I’m sure I’ll be more grateful if I have kids and if I do, at 3 weeks old I’ll probably end up purchasing a policy for my kid, and pass it over to him or her when they turn 18.
My advice would only be to take your time understanding each and every component of it before diving into it as once you’re in you are IN. As, per my policy, I have to wait 5 years should I want to cancel my plan to get all the money I’ve put into the plan, back to me.
Best of luck with whatever decision you make.
Great feedback. Around age 30 is the ideal age to get life insurance.
I would be surprised if you don’t invest in other risk assets as well overtime that great meeting for Wealth though.
Whole Life combines two features into one. Personally, if I want a savings account and life insurance, the cheapest method is to keep them separate.
1) Add Term Life. A 20-year policy could run as low as $50 depending on medical history. It will be higher for people with risk factors. Still, this product is several times less than Whole Life.
2) Buy the max $10k individual or $20k max as a married couple government i-bonds that track inflation and are yielding over 7% right now. Better yet, you control this money. Rolling investments can be made quarterly to have constant availability of funds after the 1 year holding period. No loans from your insurance company, money does not vanish at death and interest free.
Price these two strategies and I expect you will get a better return.
43 year old father of 4. I have a whole policy. I paid it off upfront (no monthly payments) and took out a loan against it with a private bank. I put 200K in the whole life policy in January of this year and received a 170K loan about 4 weeks later. The death benefit is 700K, that will grow over time. I also have term of 3M just in case. I am using the funds to rehab an 11 unit apartment building. I have been able to get $300 more per unit after rehab. Plan is to cash out refi 75-80% of the new value, should be well over 200K. My understanding is that while the policy is earning a modest interest I am able to use the funds to create more wealth. I did a trial run with my children where I bought policies for each of them and after 3 years I borrowed against them. I have to admit that I fall into the category of not being able to save on my own, if not for my real estate holdings I wouldn’t have much. So I look at the whole life polices as forced savings.
Thanks for sharing what you’re doing with your life insurance plans.
I’m going to look into the pricing of buying whole life insurance policies for my young kids. Surely, it has to be relatively cheap. I’m hopeful their custodial Roth IRA accounts will grown well over the next 20 years too.
FS, you are clearly a smart guy, I’ve enjoyed many of your posts before, you are doing all the right things, buy only term life, invest in custodial Roth for your kids, let’s be clear you will never buy a WLI for you or your kids I’m not sure why you are confusing your readers by saying you will look into WLI for your kids or saying you missed out on all the gains because you didn’t buy WLI when you were younger.
You overestimate my intelligence. But thank you.
What insurance policy are you using? And how are you investing for your kids?
Thanks
I’m 35 with 2 kids and a VUL. Are you looking at doing a traditional whole life or a variant? For me, traditional whole life or VUL are the only way to go for permanent life insurance.
Tell me more! I’m thinking converting my expiring 10-year term to a whole life policy.
I ended up getting the VUL for two purposes:
1) In WA state they passed a long term care act with an opt-out exemption if you have qualifying long term care, so I set up the policy to exceed the state’s requirement with an LTC rider.
2) I’m already maxing all retirement accounts including backdoor Roths for my spouse and I, and mega backdoor Roth for myself. So, I figured this policy is essentially an additional retirement bucket for us. I chose VUL (Pacific Life Select VUL 2) over traditional whole life so that I could invest, fund it to the MEC line, and use option B to grow the death benefit.
How do you pick between a VUL and whole life? Other ULs like indexed don’t interest me with their caps and floors,
– Jason
Only #1 may be a good reason for WLI, for everybody else buy term and invest the difference. After accounting for the high cost of WLI, hidden fees, commissions, low rate of return, there’s no way WLI can equal, let alone beat simple vanilla term life and invest the rest in a low cost index fund.
1. If you wish you had gotten whole life earlier, why don’t you convert one of your term policies to whole?
2. To me there are two “real” advantages to whole life – estate planning and tax free loans against the policy. I think the latter is no longer applicable with the availability of lines of credit tied to value of securities (basically margin loans). That way in down years you can borrow a little bit against your net worth and on up years you can sell a little bit to pay back the loan
I still can with my current term policy expiring Jan 2023. I just missed out on all those years of gains. Further, I already spent time doing a health examine 3 years ago for a new policy, and then finally applying and successful in getting a new 20 year term policy late last year.
How about you? What’s your situation?
I’m a financial advisor. I’ve been in the industry 20 years. I can sell whole life insurance, but have yet to find a time when it’s in the best interest of the client.
On an unrelated note, it’s one of the highest paying commission products…
Do none of the reasons I’ve highlighted in the article count? If you disagree with them, what do you think is a better solution?
You are the most honest financial advisor I’ve ever seen. I’m actually surprised to find one…
My whole life insurance story began in the late 70’s, just after getting married. My goal for life insurance was to provide a moderate investment vehicle that would grow over time (both insurance value and death benefit would grow year-over-year), and provide a cushion for my wife if I croaked before my time. Nine years later, when our first child was born, I rolled that into a larger policy to allow for the needs of my wife and my son, again, if something happened to me unexpectedly. When that son was 18 and our second son was 15, we divorced. By then, the proceeds from the policy were paying the monthly premium so there was no out-of-pocket expense. As I was getting divorced, I named my sons as benficiaries of the policy. However, my soon-to-be ex-wife’s lawyer demanded one-half the cash value as part of the property settlement – even though our kids were the beneficiary. Suffice to say, I against that, but my lawyer eventually said I needed to give up. Bummer. I pondered that for a couple of years, found that I was still alive, healthy, and remarried. When I turned 60 I took the cash value out of the whole life policy, and bought a prepaid long-term care policy. It won’t cover everything, but it will be a huge buffer against my accumulated investments and tax-deferred accounts for up to three years. If I croak before all long term care benefits are expended, there will be a death benefit for my family.
Not exactly the path I expected when I purchased my initial whole life policy, but it worked out for me. I’m sure if I’d had the fortitude to buy term insurance and responsibly invest the difference I’d be ahead of the game, but I’m OK with the result.
Universal Life policies are a much better vehicle than Whole. Insurance should be viewed as just that, insurance. Looking at it through the lens of investment (outside of very specific HNW cases) ends up usually a negative real return relative to any other investment class, especially in low rate environments.
It’s not a matter of which one is better but which one is less crappy than the other
My wife and I are in Scenario #2 above — maxed out retirement savings options and were looking for a tax free income options. My wife opened a financed premium life insurance policy, where a bank finances a portion of the premiums, to greatly increase the value of the death benefit and the tax free loans possible against the death benefit in retirement.
Here is an article that helps explain more about these types of policies: forbes.com/sites/forbesfinancecouncil/2021/07/08/premium-financing-an-option-for-disappointed-life-insurance-policyholders/?sh=7c8b43cf7b33
I do a lot of that Ron, just need to make sure the trust is structured in a way where you have “spousal access” to the trust to borrow from the policy.
Hi Friends, you don’t borrow “from” the policy, you borrow “against it”.
Ron, please know the Forbes article you point to has the client possibly cancelling whole life (with guaranteed premiums that never change) to buy Universal Life. So maybe I’m wrong, yet if they are cancelling Whole Life and having the client buy Index Universal Life (as is stated in the article), that is a very sad step. Universal Life of any sort (index, variable, regular, guaranteed, any kind of Universal Life) can increase premiums, Whole Life cannot. Universal Life is often spoken of as a “permanent” product, yet it is not.
I have two term policies. One will refund all premiums at the end of the thirty year period. The other 30 year term will allow me to convert to a permanent policy at my current health status. At that time, it will be a great option for my future children to benefit from. Don’t look at it from the cash value POV, rather look at the guaranteed death benefit. If you do the math, making your children pay premiums at conversion will create a fairly attractive ROI
“ One will refund all premiums at the end of the thirty year period”
What do you have to give up? Do you have to pay higher premiums in the meantime? This seems like a pretty good deal as all you lose is the opportunity cost of investment returns.
Conversion (or switching from term to permanent) is such a great feature. Yet you’ll want to be sure “permanent” is truly whole life permanent, not universal life permanent, as the latter is not truly permanent.
Kim, are you saying my indexed Universal life can cancel me when I’m being high risk (old)? How is I it not permanent?
With universal life the underlying insurance cost increases every year as with annually renewable term.
Typically you are quoted a minimum annual premium for universal that isn’t high enough to compensate for the above.
So when you look at the guaranteed (not projected) illustration it will show the UL policy “blowing up” (requiring large cash infusions to keep in force)
In my case that was a couple of decades down the line for a couple of policies I did not choose, but got stock paying for (family business related)…can’t say more since I expect to go to litigation over them.
Not a good deal, much higher premium.
The return of premium term life is much more expensive than the vanilla term life. The difference in premium invested in a low cost index fund will return much more than the premium paid over 30 years
I’ve had 2 custom whole life policies for 10yrs now. It’s definitely not the fastest horse in the race, but a very safe 6-7% dividend each year if you choose the right mutual companies.
What I did was take a loan against the cash value at 5%, while the dividend kept compounding at 6.75%. Netting a 1.75% arbitrage. I used the loan to purchase rental properties which are all for sale now 2 years later netting a 75% return in 2 years. (Just got lucky with the market)
I also bought some Bitcoin as well back when it was $12k a coin.
So the best part about it, is not only do you get a constant premium even when you get older, but the money your using to buy something you already need. Then being able to spend the same money again to invest in other asset classes.
Any unpaid loans get taken out of your death benefit, but if the money was used intelligently this would not be a big issue.
Do you get a guaranteed 6-7% dividend a year? Or is it based on a 60/40 or some asset allocation?
James – you can collateralize that policy at better rates than 5% today. The 6% dividend is a gross return, you need to net out mortality expenses. Likely closer to break-even.
Nice work Brian, Any dividend listed on any mutual companies web site is a gross dividend, reduced by 3 things: cost of mortality (death benefit), commissions (a good thing) and administrative costs of running the mutual life insurance company (which means the insurance company is literally owned by the policy holders). You can figure out what your net rate of growth is (which is a combination of guaranteed growth plus non-guaranteed dividends) using TruthConcepts calculators. Agreed, the above is a wash, AND the wrong comparison. Compare your growth to a savings account and your loan cost to any other loan cost (credit card or ?)
Sam, can you do a write up on infinity banking/being the bank? I know both use insurance and one can withdraw the monies to do investments.
I used the same method in my comment below.
I would also love to see Financial Samurai put his brilliant brain to work on IBC. I’ve contemplated it before.
I’m surprised the average cost of whole life is between $55-136/month. I would have though it to be way higher than that. Term life is definitely so much more simple, which is what I have. But I never knew the pros of whole life. If the estate tax limit gets slashed back down I can see how that will make whole life beneficial to a lot more people. I never thought about purchasing life insurance for my kids but it is something to think about.
Over the last 15 years or so, I’ve just been taking out a new 30 year term policy every 5 years, with also a 10 year higher value one active. Though the one I took out a few years ago, was only a 20 year one, as premiums are starting to get high (age 46 now).