The Truth About Whole Life Insurance

Life insurance is a big, booming business. The life insurance and annuities industry had a revenue of about $1.1 trillion in 2022 according to IBIS world research. That’s a lot of money going around, and let’s be honest, we pretty much all know someone that has gotten their life insurance license and worked for whatever mutual or life company. If you have purchased a whole life policy from one of these companies or are looking at working with one of these companies, this article is for you. Now, I’m not saying life insurance is a scam, no, far from it. Life insurance is an important part of any family’s financial plan. However, there are many different types of life insurance and annuities, but we’re just going to hit on the three most popular life insurance types today and explain what a scam life insurance is.

When it comes to life insurance, most consumers focus on two things, the premium and the death benefit. The most important part here is the death benefit, this is the piece that ensures your family is going to be taken care of if the unthinkable happens. We typically recommend around 10 times your salary for the death benefit. So, a $50,000 salary means $500,000 in death benefit. This is where the differences start. Let’s look at the three most common types of policies, and if you already have a good idea of the differences, you can move quickly through the next paragraph.

Here are the basics of Whole Life, Term Life, and Universal Life. Whole Life and Universal Life are permanent policies, meaning you should have it until you die if the policies are active. Term Life is for a certain period, usually between 10 and 30 years in 5-year increments. The reason the Whole Life and Universal Life policies can last longer is their build up of a cash value. So, some of the premium goes towards the life portion, and another goes towards the cash value portion. The difference between Universal Life and Whole Life is how the cash value is invested. With Universal Life, it depends on the type of Universal Life (Variable or Index) on how funds are invested. Index Universal Life will see returns like an Equity Index Annuity, whereas a Variable Universal Life policy will see returns like a Variable Annuity. A Whole Life policy on average sees a return of 1.5% according to consumer reports. Term Life on the other hand does not build a cash value, and because of that is typically much less expensive than Whole Life.

Let’s run a quick example of why I choose Term over Whole Life every time. A 30-year-old male, with 50K of income has $180 a month budgeted for life insurance. Any money left over can go to his retirement plan. The $180 a month Whole Life policy will have a coverage of about $250,000 and the cash value at age 50, is projected to be worth $24,000, and at age 70, $65,000. A 20-year term life insurance policy with the same death benefit of $250,000, which we discussed earlier is still under insured, would cost around $13 a month, leaving $167 a month to be invested. This gives us a projected investment value of $144,561 at age 50, and $1,436,222 at age 70. For a $500,000 term policy the premium would rise from $13 to $20 a month. The investment values do take a small hit, but the values at age 50 and 70 are $138,501 and $1,376,019. This is what I would recommend for this scenario.

So why does anyone ever recommend whole life? Well, life insurance is a commissionable product, and it’s usually something like X% of first year premiums. So, the whole life policy that is $180 in premiums makes more than the $20 premium. This is why working with a fiduciary advisor is important. Someone that has the client’s best interest at heart. If you would like to talk about your life insurance situation you can email me at korey@sdsmithfinancial.com