Pros and Cons of Whole Life Insurance

Christian Worstell
In this article...
  • Explore the disadvantages of whole life insurance and find out when a term policy may be a better option. Get the facts you need to choose the right insurance.

Whole life is one of the two main types of life insurance. The American Council of Life Insurers (ACLI) reports that more people buy whole life insurance policies than term policies every year. In 2019, 59% of all policies sold were whole life.

People who opt for whole life insurance seek to reap the many benefits of this type of policy. However, whole life isn't the best option for everyone. Knowing the disadvantages of whole life insurance can help you determine which type is right for you.

What Are the Disadvantages of Whole Life Insurance?

A whole life insurance policy lasts until your death while term policies remain in effect for a set period. As you pay your monthly premium, a whole life policy builds up a cash value. Read on to learn the main disadvantages of this type of insurance.

Cost

Generally, the monthly premiums for whole life insurance cost more than with term policies. A survey conducted by Consumer Reports found that whole life insurance premiums were up to 10 times more expensive than the premiums for a term life insurance policy that pays the same death benefit. The accumulation of a cash value contributes to the higher price. In addition, life insurance agents usually receive bigger commissions on whole life policies.

Death Benefit Size

The amount of your premium is tied to the size of the death benefit that your life insurance policy would pay. Larger death benefits come with higher premium payments. As a result, you may be unable to afford a large enough death benefit to provide full financial protection for your family with a whole life policy.

Effects of Inflation

With a whole life insurance policy, you receive interest on the cash value of your account. Depending on the policy, the interest rate is usually 1% to 4%. When inflation levels rise, the amount of interest that you earn may be offset by rapid increases in the cost of living.

Limitations on How Money Is Invested

When you choose a traditional whole life insurance policy, the insurance company determines how to invest the cash value portion of your policy. If you're a savvy investor, you may be able to earn a higher rate of return investing the amount added to the cash value elsewhere.

Variable life insurance policies provide an answer for people who wish to have more control over their investments. With this type of permanent insurance, you have the option to choose the investment, usually from a selection of mutual funds. The drawback to this type of life insurance is a risk. If the market crashes, you could lose the amount that you invested in the policy and the interest earned.

Lack of Flexibility

As you age and your family grows, your life insurance needs may change. Whole life policies lock you into a fixed death benefit that may become too small or large over time.

Universal life insurance can provide a solution to this problem. Like whole life, universal life is a permanent policy that remains in effect until you die. The policy allows you to increase and decrease the size of the death benefit. When you make an adjustment, the amount of your premium changes accordingly. Universal variable life insurance policies that combine the features of both universal and variable life insurance are also available. 

What Are the Benefits of Whole Life Insurance?

Whole life insurance policies do have some advantages over term life insurance as outlined below.

Stability

Once a policy is in place, whole life insurance remains in effect unless you stop paying your premiums or cancel the policy. Life insurance policies typically require you to undergo a physical examination before acceptance. With whole life, you most likely will not have to complete another health questionnaire or undergo a physical again. Term life policies normally involve one or both with each renewal. If you develop a medical condition, you may be unable to renew your insurance, or the premium may greatly increase. You won't have to worry about this occurring with whole life.

Fixed Costs

With traditional whole life insurance, you pay the same premium over the life of the policy. Your age, changes in your health status and increases in cost of living won't impact how much you pay going forward. Term life insurance premiums may go up with each renewal. Whole life allows you to easily budget for premium payments both now and in the future.

Tax Advantages

The interest that you earn on the cash value of a life insurance policy is tax deferred — unlike many other investments that require you to pay tax on interest and dividends annually. When you die, the death benefit paid to your beneficiaries is usually not taxed. If you never make a withdrawal from the cash value of your policy, you could possibly pass on the lump sum and the interest earned when you die without ever paying tax.

Access to Cash

With whole life insurance, you can withdraw from the cash value of your account if you need to pay for a major expense or supplement your income. In addition, you may be able to borrow against the cash value of the policy by pledging it as collateral.

What Is the Catch With Whole Life Insurance?

The benefits of whole life insurance may sound too good to be true, but there really isn't a catch. The main disadvantage of whole life is that you'll likely pay higher premiums. Also, you're likely to earn less interest on whole life insurance than other types of investments.

What Is Better: Term or Whole Life?

 The type of life insurance that is right for you depends on several factors.

  • How long you need insurance
    If you only wish to be insured for a certain period, term is likely the better option.

  • Your risk of health problems
    If you're at an increased risk for developing a health condition or complications due to an existing condition, whole life might be the better choice.

  • If your family situation may soon change
    If you plan to have children or your kids will soon be ready to become financially independent, term life insurance or a universal whole life policy will give you the flexibility to adjust your death benefit accordingly.

  • Your current income
    If you only have a limited amount of money to spend on premiums, a term policy will usually allow you to get a bigger benefit for a lower price.

  • If you have any other savings
    Whole life insurance allows you to both build up savings and to pass a death benefit on to your family.

  • Your tax situation
    If you wish to lower your tax liability, whole life insurance may be right for you.

You can get help to calculate your life insurance needs and compare plans that are available where you live. Compare life insurance plans online, including whole life insurance, term life insurance and other types of policies. You can also request a free plan comparison and chat with a licensed insurance agent who can help you compare plans.

Christian Worstell
About the Author

Christian Worstell is a senior Medicare and health insurance writer with HelpAdivsor.com. He is also a licensed health insurance agent. Christian is well-known in the insurance industry for the thousands of educational articles he’s written, helping Americans better understand their health insurance and Medicare coverage.

Christian’s work as a Medicare expert has appeared in several top-tier and trade news outlets including Forbes, MarketWatch, WebMD and Yahoo! Finance.

While at HelpAdvisor, Christian has written hundreds of articles that teach Medicare beneficiaries the best practices for navigating Medicare. His articles are read by thousands of older Americans each month. By better understanding their health care coverage, readers may hopefully learn how to limit their out-of-pocket Medicare spending and access quality medical care.

Christian’s passion for his role stems from his desire to make a difference in the senior community. He strongly believes that the more beneficiaries know about their Medicare coverage, the better their overall health and wellness is as a result.

A current resident of Raleigh, Christian is a graduate of Shippensburg University with a bachelor’s degree in journalism. You can find Christian’s most recent articles in our blog.

If you’re a member of the media looking to connect with Christian, please don’t hesitate to email our public relations team at Mike@MyHelpAdvisor.com.

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