Why is Whole Life Insurance Not Worth It?

Thang Truong
Thang Truong
Updated on:

Are you interested in getting a whole life insurance policy, but aren’t sure about whole life product? Choosing your life insurance is a process that requires careful thought and research to find the perfect match. You certainly don’t want to invest in the high premiums that come with whole life insurance if it isn’t going to be the best use of your money! Let’s take a closer look at whole life insurance and compare it with a few other options to find out for certain why it is not worth it.

What is Whole Life Insurance?

Where term life insurance only covers policyholders for 10, 20, or 30 years, whole life insurance is a type of permanent insurance policy that is good for life. You’ll usually pay a set premium for a set number of years until the whole life insurance policy is considered paid up. You can also choose to pay premium for the rest of your life.

You can also find a kind of guaranteed whole life or final expense insurance with lower death benefits, usually between $5,000 to $25,000. This policy is intended for seniors and those dealing with poor health. The payout is much lower than a typical insurance policy, but it is guaranteed coverage and you don’t need to have medical exam to be eligible for this type of policy.

Whole life insurance also has a second component in addition to the death benefit called, cash-value. This is an additional value in the policy that accrues over time at a set interest rate, usually 2% per annum. Policyholders can also make tax-free withdrawals (in the form of a loan) from your insurance against the cash-value that has accrued when needed. However, they will need to pay interest rate on the loan, which is charged by the insurance companies. And if they don’t pay back, either principal or interests or both of them, the death benefit will be deducted accordingly.

Advantages of Whole Life Insurance

Whole life insurance does offer benefits for policyholders which is why many consider it over other options on the market. Some of the main benefits include:

  • Insurance coverage for life
  • Level premium payments
  • Cash-value that increases with time
  • Potential dividend payments, if the policy is issued by a mutual insurance company. Learn more about Dividend Paying Life Insurance policy

Disadvantages of Whole Life Insurance

Unfortunately, whole life insurance comes with a few hefty drawbacks. It’s a less flexible policy compared to modern options, like any universal life insurance: guaranteed universal, indexed universal, and variable universal all offer Whole life death benefits or premiums aren’t usually adjustable. Nor can you increase the growth rate of your cash-value. 

Here’s a quick run-down of the drawbacks:

  • Much more expensive than other policies with less benefits
  • Slow cash-value increases compared to other universal policies such as indexed and variable
  • No flexibility
  • Medical exams usually required, except for guaranteed issue or final expense whole life policies

>>MORE: Is Whole Life Insurance Worth It? A Case Study

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Why Consider Other Life Insurance Policies?

There are many other kinds of permanent life insurance policies available which offer some of the same kinds of benefits as whole life insurance. You may even find that they are a better fit depending on what you specifically like or dislike about whole life insurance.

  • Guaranteed Universal Life: A guaranteed universal life insurance policy (GUL) offers a guaranteed death benefit, but almost no cash-value growth. This compromise means that your premiums are much lower compared to whole life.
  • Indexed Universal Life: An indexed universal life insurance policy (IUL) provides a cash-value component that is tied to the index market’s growth. This is a conservative investment but you won’t lose money if the market has a bad year. Plus, the ROI is usually much higher overall compared to a whole life insurance policy’s 2% growth rate. S&P 500 index has an average growth rate of 6.9% in the past 40 years. The policy also allows much greater flexibilities in increasing or decreasing or even skipping premiums. Withdrawing cash from the policy is also much easier and completely tax free, making it a perfect choice for retirement savings. Even with all of those benefits, it is usually much cheaper than an equivalent whole life policy.
  • Variable Universal Life: For maximum growth, you might want to consider a variable universal life insurance policy (VUL) which allows you to pick one or more kinds of investment products to place your cash-value in. This is a riskier option with increased investing fees and potential for losses, but the returns are usually greater than an IUL, especially in good years and if you have experience in investing. Some VUL products also offer guaranteed face value or death benefit, in addition to the abilities to grow cash value aggressively. Variable universal policies also offer similar flexibilities as in indexed universal policies.

>>MORE: The Differences Between Variable Life Insurance (VLI) and Variable Universal Life Insurance (VUL)

Comparing Whole Life Quote with GUL, IUL, and VUL Quotes

To get a really good idea of whether whole life insurance is worth it, we’ve pulled illustrations for other kinds of insurance for comparisons. We’ll look at the premiums, the death benefits, and other factors that can change from policy to policy.

Each of these policies is for a man, aged 39-40 years old, who is a non-smoker. As you can see from the table, the initial death benefit and interest rate for cash-value growth varies a bit. It’s difficult to draw apples-to-apples comparisons with universal life insurance plans as the interest rates can vary over the life of the policy due to market fluctuations. Just assume that the cash-value growth rate for each remains the same throughout.

Whole Life QuoteGUL QuoteVUL QuoteIUL Quote
Carrier and ProductMassMutual Whole Life Legacy 20 Pay Prudential PruLife Universal ProtectorLincoln AssetEdge VULJohn Hancock Flexible Premium Life Insurance Policy
Permanent CoverageYesYesYesYes
Cash-Value Growth Rate2%1%7.44%5.92%
Initial Death Benefit$300,000$300,000$200,683$82,808
Annual Premium$7,083$2,805$7,000$3,000
Scheduled Premium Period20 years20 years20 years20 years
Total Premiums Paid$141,660$56,100$140,000$60,000
Guaranteed/Non-Guaranteed Cash-Value at 90Guaranteed – $258,222N/ANon-Guaranteed-$273,665Non-Guaranteed-$223,665
Death Benefit at 90$300,000$300,000$474,348$29,579
Potential Retirement IncomeNo – Withdrawals available for unexpected expensesNo- Not designed to build cash-valueYes – $25,284 yearly from 65 to 90 years oldYes – $9,429 yearly from 65 to 90 years old
Total retirement income withdrawn00$632,100$235,725

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The most important thing to note here is that both a VUL and IUL allowed the policyholder to draw a decent retirement income from the age of 65. The VUL offered the greatest return with a $25,000+ tax-free, annual income. Plus, there was still a substantial death benefit and cash-value for beneficiaries.

>>MORE: Is Whole Life Insurance Good for Retirement Savings? A Case Study

It is also clear that in any case, whole life insurance is not a good policy to have. If having guaranteed death benefit for your loved ones is the most important thing to you, a GUL policy is much cheaper than a whole life policy: $2,805 a year for premium vs. $7,083. If having access to a substantial cash value account to supplement your retirement income is important to you, a VUL policy with a similar premium provides a much better option. If you can’t afford $7,000 a year in premium, IUL product can be a very strong alternative at a much cheaper premium (only $3,000 a year).

>>MORE: How to Use Life Insurance in Retirement Planning? A Case Study

Final Thoughts

  • Whole life insurance has much higher premiums compared to other similar life insurance products.
  • Cash-value growth is slow at just 2%, but it is guaranteed.
  • The represented VUL offers the highest potential cash-value growth at 7.44%.
  • The GUL offers a guaranteed death benefit for less than half the price, but no cash-value.
  • Both whole life and universal life insurance policies are permanent life insurance.
  • Policyholders could potentially rely on a VUL or IUL policy for annual retirement income.
Thang Truong
Thang Truong

Thang Truong covers small business insurance and small business success at BravoPolicy. He is a licensed P&C insurance agent. Previously, he held product leadership positions at realtor.com, Capital One, NerdWallet, and Mulberry Technology. He holds a MBA degree from UC Berkeley - Haas School of Business.

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