Getting started with Whole Life Insurance, also known as Permanent Insurance or Cash Value Life Insurance. It is designed to pay your family a lump sum (i.e. Death Benefit) if you pass away – just like any form of life insurance. Whole Life insurance is unique. As you do your due diligence you will find everyone has an opinion regarding Whole Life.
A couple of things to keep in mind as you dive in…
Each insurance company may have slightly different products. The information below is an overview to get your started.
My goal with this article is to provide a starting point with Whole Life Insurance. You will find insurance agents and financial planners on both sides of the fence when it comes to Whole Life. This is your starting line. Take advantage of the information at your fingertips.
The best piece of advice – ask questions.
Quick Guide
- Getting Started with Whole Life Insurance
- Types of Whole Life Insurance
- Pros of Whole Life Insurance
- Cons of Whole Life Insurance
- Buyer Beware
- Is Whole Life Right for You?
READ MORE: Taking Control of Your Financial Future
Getting Started with Whole Life Insurance
Whole Life insurance is different because it provides living benefits. Benefits you can tap into while you are alive.
Depending on the insurance company, Whole Life policies will last your lifetime (or until a specific age…an example may be age 110)…as long as the premium is paid.
Let’s say you are a 28 year old Male who buys a Traditional Whole Life policy with a $50,000 Death Benefit.
| YEAR | AGE | MONTHLY PREMIUM | DEATH BENEFIT | SURRENDER VALUE | PAID-UP INSURANCE |
|---|---|---|---|---|---|
| 1 | 29 | $31 | $50,000 | $0 | $0 |
| 10 | 38 | $31 | $50,000 | $2,168 | $13,450 |
| 30 | 58 | $31 | $50,000 | $12,323 | $36,300 |
| 50 | 78 | $31 | $50,000 | $29,898 | $46,200 |
Monthly Premiums
For starters, your premiums are locked for the life of the policy. In the table above, this gentleman’s premiums are $31 per month for the life of the policy.
Death Benefit
Second, notice the Death Benefit does not change. It is fixed at $50,000. The Death Benefit is the amount of money your Beneficiary will receive in the event you pass away.
Cash Value
Over time your policy will accrue Cash Value. Think of putting money in a savings account and the money grows with interest over time.
When you die, your Beneficiary will only receive the Death Benefit. They do not receive the Cash Value plus Death Benefit. The Cash Value goes back to the insurance company.
Surrender Value
In column 5 of the table above you will see Surrender Value. If you canceled your policy this is the amount you would receive from the insurance company. You see in year 1 the policy has not accrued any Cash Value. Yet when you reach age 78 you would have $29,898 available should you Surrender the policy.
Keep in mind, should you Surrender the policy, the Surrender Value is subtracted from any pending loans and interest that may be outstanding.
Loans
With a Whole Life policy you can borrow money from the policy once it has some Cash Value available. Know it takes a few years for the Cash Value to start accruing. Beware, some insurance companies will charge you interest on your loan.
Paid-Up Insurance
Another option you have with Whole Life Insurance is Paid-Up Insurance. Let’s say at age 58 you don’t want the Whole Life policy any longer, BUT you still need life insurance. Instead of Surrendering the policy and taking a lump sum of money, you could buy a Term Life policy with the Surrender Value. Looking at the table above you would have $36,300 available. Prior to switching your policy from a Whole Life to a Term, the insurance company will be able to determine how many years your new Term policy will be paid-up. You will be taking that $36,300 to pay for a Term a policy. Therefore you will not have to pay a monthly or annual premium on it. Just know the Term policy is not designed to last forever.
“For 99% of families it [Whole Life Insurance] doesn’t make sense. I’m a big fan of keeping investments and insurance separate. They are more efficient separate than together for most people.”
DJ Brooks, CFP, Storyline Financial Planning
Types of Whole Life Insurance
I’ll do my best to keep this simple. Don’t let the different types of Whole Life Insurance overwhelm you. Remember, if you’re unclear, ask questions.
1. Traditional Whole Life
Traditional Whole Life policies provide you with coverage for as long as you live, providing the premiums are paid. It provides a Death Benefit to your Beneficiary should you pass away. Plus it affords you Living Benefits, such as:
- Borrowing from the Cash Value
- Surrendering the policy
- Collateral for a loan
- Tax-deferred growth
Ten Pay Whole Life
The nuts and bolts of the policy is the same as a Traditional Whole Life policy. The difference is you only pay for the policy for ten years. At the end of ten years you’re done paying for it. The policy is yours to do with as you wish.
Single Pay Whole Life
Again, similar to a Traditional Whole Life. A Single Pay policy means you pay one lump sum at the beginning of the policy and you never pay on it again.
2. Universal Life
Universal Life (UL) policies are more complex than Traditional Whole Life. UL policies can provide flexibility when it comes to the ability to change the amount of your premium (i.e. overpay or under pay), benefits, and ability to access the Cash Value.
3. Variable Life
Traditional Whole Life and Universal Life provide fixed rate of returns. On the other hand, Variable Life allows you to pick the type of investment you want (stocks, bonds). This creates more risk than other types of life insurance.
Pros of Whole Life Insurance
In the right situations, there can be some benefits to buying Whole Life Insurance. Let’s look at those options.
For Kids
Timmy is diagnosed with skin cancer in his early 20’s. When he graduates college he decides he wants to buy life insurance. Yet he is unable to because of the skin cancer. At this point he has beat the cancer. In Timmy’s case, it will be a few years before he is eligible to buy life insurance. Once he is eligible the price will be much more expensive due to his prior bout with cancer.
The unfortunate reality is kids are not immune to diseases that can impact them for their entire life.
Whole Life policies for kids are generally inexpensive. For instance, a $25,000 Whole Life policy may cost $150 per year.
Circling back to Timmy, if his family would have purchased a life policy for him at an early age (and premiums were consistently paid) he would have been able to keep that policy during his stint with cancer and beyond. His premium and Death Benefit would have been locked in at the inception of the policy.
Of course he could purchase additional insurance later in life, but having a policy someone bought him as a child into adulthood would provide him and his family with peace of mind.
Traditional, Ten Pay, and Single Pay Whole Life options are great options for kids.
If you’re looking for an investment or a college fund for your kid(s), Whole Life isn’t the answer. Talk with a financial planner.
Predictable Premiums
Traditional Whole Life policies have fixed premiums. Your premium will be locked in for the life of the policy…unless you have Universal Life or Variable Life product. In that case you would need to refer to your policy for specifics.
Borrowing from Whole Life
Let’s say you find yourself in a difficult money situation. Whole Life policies allow you to borrow money from the policy. Understand some insurance companies will require you owe the principle back plus interest.
In addition, borrowing from your life policy will reduce your Death Benefit. Let’s say you have a $50,000 Death Benefit and you borrow $10,000. If you pass away your family will receive $40,000.
The other caveat is the policy has to reach a certain age of maturity to have Cash Value available to borrow. If you started the policy 8 months ago it’s doubtful you have enough Cash Value to borrow from.
The concept of borrowing money from a life policy is no different than borrowing money from the bank.
Although I put Borrowing from Whole Life in the Pros section, I would be cautious before doing so. Here is a good article on the nuts and bolts of borrowing from your Permanent Life policy: How Life Insurance Loans Really Work And Why It’s Problematic To “Bank On Yourself”
High Net Worth
DJ Brooks, owner of Storyline Financial Planning provided some insight regarding Whole Life Insurance and high net worth individuals:
“One of the few instances where I think Whole Life Insurance makes sense is high net worth individuals that have maxed out their retirement plan at work or their IRA. Then it could be an option to consider if they need insurance as well. This provides a place where your money can go to work and provide insurance without a limited term (i.e. last the rest of your life). You’re getting insurance needs taken care of the rest of your life. You get a savings component and the flexibility component…if you need to borrow from the policy you have the ability to do so. Lastly, it allows you to pass on your assets and net worth tax free. The benefit is you’re making your premiums after tax, the proceeds from the policy will be tax free.”
An Asset
Whole Life Insurance policies accumulate Cash Value over the life of the policy. As the Cash Value grows you have the ability to Borrow or Surrender the policy. Therefore giving you access to the cash. When you go the bank to get a loan, the bank will have you fill out a personal financial statement. It will ask for your Assets and Liabilities. A Whole Life policy with Cash Value would be considered an Asset.
Dividends
Some (not all) insurance companies will pay a Dividend if the insurance company performs well. You can use the Dividend to pay your premium, reinvest in your policy, or take the cash. If your policy offers Dividends, verify if there are any guidelines regarding how you take your Dividend.
Business or Estate
Let’s say you own a farm. One of your children would like to take over the business some day while your other children don’t have any interest in it. Life insurance could be a tool to provide a fair inheritance.
Business partnerships often require life insurance to be purchased. The business buys life policies on each of the partners. In the event one of the partners dies, the business has the ability to buy the deceased individuals interest in the business – therefore making his/her family whole and relieving the business of any possible conflicts between the owner(s) and deceased partner’s family.
A Whole Life policy can also be a good employee retention benefit.
Cons of Whole Life Insurance
Whole Life is fascinating because there are so many viewpoints. It is subjective in nature. I encourage you to do you due diligence when looking at Permanent Life Insurance.
Forced Savings Plan
I considered putting Forced Savings Plan in the Pros list above. I realize some people struggle to save. Whole Life could provide a way for someone to save money, but it’s not ideal. You can’t borrow from the policy until it reaches maturity. Even then you will owe interest on what you borrow.
Brooks cautioned, “Whole Life Insurance has a lot of fees associated with it. It can be a costly way to have insurance and have a savings component.”
If you find yourself trying to build your savings, I would encourage you to seek a local financial planner. Other good resources would be sites like Millennial Money Man or Good Financial Cents.
You have the ability to save, you may need a little guidance mixed with will power.
Complicated
Whole Life Insurance can be more complicated than Term Life. Don’t get me wrong, if you want to take the time to learn and understand it, the information is available. If you don’t understand the product, be cautious before putting your money in it. Ask questions.
Expensive
Whole Life insurance will be more expensive than a Term Life policy. In the tables below are a couple of examples of Traditional Whole Life versus a 30 Year Level Term.
The first example is a male, non-smoker.
Insurance company is Cincinnati Life Insurance.
Rating class is Preferred.
Premiums below are monthly.
| AGE | WHOLE LIFE | 30 YEAR TERM |
|---|---|---|
| 25 | $57.15 | $13.95 |
| 35 | $82.62 | $14.58 |
| 45 | $123.75 | $27.54 |
In the second example below we have a female, non-smoker.
Insurance company is Cincinnati Life Insurance.
Rating class is Preferred.
Premiums below are monthly.
| AGE | WHOLE LIFE | 30 YEAR TERM |
|---|---|---|
| 25 | $51.39 | $11.97 |
| 35 | $75.51 | $13.14 |
| 45 | $107.10 | $21.87 |
Investment
Insurance is not an investment. There will be people that will argue with me, but I don’t believe it. The goal of insurance is to make you whole again. If your house blows away, homeowners insurance helps you financially repair or replace your home. Most people can’t afford to write a check for that large of an expense.
The same is true with life insurance. The objective is to replace your income for a period of time if you pass away early so your loved ones aren’t left holding the bag.
DJ Brooks commented, “When you start to put investments into Whole Life Insurance, which can be a pretty complex product, it can be a pretty vague product for most people. It muddles their financial plan and goals.”
The table below is an illustration of Cash Value accruing overtime. The example is of a 30 year old male and female purchasing a Whole Life policy.
Non-Smokers
Insurance company is Auto-Owners Insurance.
Rating class is Preferred.
Death Benefit is $100,000
| AGE (MALE) | CASH VALUE | AGE (FEMALE) | CASH VALUE | |
|---|---|---|---|---|
| 35 | $1,282 | 35 | $958 | |
| 40 | $4,754 | 40 | $3,958 | |
| 45 | $8,867 | 45 | $7,638 | |
| 50 | $13,849 | 50 | $12,181 |
Buyer Beware
In full transparency, insurance agents make a commission when they sell life insurance (any type of life insurance). Whole Life Insurance generally leads to larger commissions.
I don’t believe all insurance agents are looking to swindle you. It’s disappointing. The insurance and financial services industry is a wonderful business to be in. I truly believe it is a business where you can help people.
To be clear, I’m not a financial advisor, nor do I offer investment products. If some of the investment related perks to Whole Life sound enticing, write them down and compare/contrast those things with a financial planner to see if there are other investment options available.
Is Whole Life Right for You?
“For most individuals and families, they are better off listing out their capital needs should someone die prematurely. What do they want to accomplish? Take out Term Life Insurance in the amounts and timelines to cover those goals. Then separately identify their investment needs and save accordingly.” Brooks commented.
Yes, if you fall into the small percentage of people mentioned above, it might be worth taking a look at Whole Life (aka Permanent Life Insurance). For most young individuals that need life insurance, Term Life insurance is the way to go.
