Is Whole Life Insurance Worth It?
Whether whole life insurance is worth it for you depends on a number of factors, including your personal financial situation and level of risk aversion.
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Achieving financial health means you must plan carefully for your future, and that means choosing among a confusing array of products.
Many investors are worried about losing money in risky investments like the stock market. Not all investment types are high-risk, however. Investors also have plenty of conservative investments that offer modest – but guaranteed – growth.
One type of investment that can serve as a safe bet while also protecting your family’s financial health in the case of your death is a whole life insurance policy.
Getting to Know the Life Insurance Industry
Most people understand the basic concept of life insurance — upon your death, your family receives a prearranged sum of money based upon your policy agreement. Not everyone knows, however, that there are two major types of life insurance.
The first is term life insurance. That covers you for a set amount of time and then expires if it isn’t renewed, usually at a new rate for standard of coverage. Many of these policies don’t demand a medical exam, bloodwork, or other extensive approval requirements.
Whole life, however, covers you for your entire life, and has a fixed rate throughout the life of the policy. It also earns a cash value over time. And, while it’s certainly not going to make you rich, it does serve as a reliable investment.
Regardless of whether you choose term or whole life, the cost depends on your age, quality of health, and the type of policy you’re looking for. You should always check with multiple providers and do some research before committing to a policy of any kind.
Benefits of a Whole Life Insurance Policy
Unlike a term policy, which is limited to five, 10, or 20 years, a whole life policy will cover you until your death, regardless of how long you live. The fixed rate means the policy is predictable and can work both for those on a budget and those with more disposable income to invest. It’s a safe investment as well, since it’s not in the stock market or any high-risk ventures. As long as you continue paying the premiums, the policy is guaranteed to increase in value.
If you choose, you can cash the policy in at any time after the probationary period — usually the first two years of the policy. The longer you wait to cash it in, however, the more it will be worth. Some whole life policyholders choose to cash in their policies to pay for their child’s education, or to invest elsewhere. Others let the cash value pile up until they use the policy for its intended purpose: as a benefit for their families after their death.
Disadvantages of a Whole Life Insurance Policy
While term life policies are generally inexpensive, whole life policies can cost significantly more per month, and it takes several years of on-time premium payments for the cash value to accumulate. If you’re looking for a high rate of return on your investments, a whole life policy probably isn’t your best bet.
The rate of accumulation is slow and steady as opposed to more risky investment types like stocks that can yield double-digit gains. If you plan to eventually cash in your policy, you may be better off investing your money in a different investment vehicle, and using a term life policy for your life insurance needs.
Whole life policies also tend to be harder to get approved for. There are often physical exams, bloodwork to check for any pre-existing conditions. They have much higher premiums for lifestyle choices that may make you less desirable as a policyholder, such as smoking tobacco or having a dangerous profession.
Is Whole Life Insurance Worth It?
Whether whole life insurance is right for you depends on a number of factors, including your personal financial situation and level of risk aversion. It can serve as an excellent conservative investment in a diversified portfolio. Whole life insurance does not, however, do well as your only investment. If you’re a disciplined investor who is content to leave the policy in place, it can offer a steady growth of cash value.
>> Read More: Is Life Insurance Worth It?
Before making any decisions, talk to a financial planner, investment professional, and your family. Make sure that they understand your plan, and that you are well-informed both about the parameters of your proposed plan, and about any other options that are available to you. Ask questions, do research, and be confident before signing any agreement or purchasing any whole life insurance product.
Author: Jeff Gitlen, CEPF®