Are Whole Life Insurance Polices Worth The Cost?
The first time you hold your child, you realize how fragile and delicate life can be.
Those first cries, those first giggles, and the way those tiny fingers curl around yours, change everything.
Your life shifts, your priorities change, and it’s no longer just about you; it’s about giving those tiny fingers a fulfilling life.
Yet, despite our best efforts, life doesn't always turn out the way we planned.
So, it’s just as important to stay wary of all the what-ifs.
“What if I wasn’t there tomorrow?” Would my child have everything they need to live a beautiful, joyful life? Would my spouse have the financial support she would need? Would they be able to make all the plans you’ve dreamed of together come to life?
While there are various types of life insurance, this blog will help you understand whole life insurance.
That way, you can go to bed with one less worry on your mind…
Start today and ensure that those tiny fingers stay protected for a lifetime.
Whole Life Insurance Isn’t So Complicated
What is Whole Life Insurance & How It Works?
Whole life insurance is the simplest permanent life insurance policy that acts as a savings account and covers the insured person for their life.
You agree to pay a monthly, quarterly, or annual premium for a set number of years, ranging from a couple of years to a couple of decades. And as long as you pay your premiums and complete the contract length (the set number of years), your policy and coverage will remain active.
Over time, your policy accumulates cash value.
This combination of lifelong coverage and growing cash value makes whole life insurance a smart choice for building wealth and ensuring your loved ones are cared for.
Now, what do we mean by cash value?”
When you purchase a whole life insurance policy, a portion of your premium goes toward the death benefit, and the other goes into a savings component known as cash value.
The cash value component is a type of savings account, so you can cash out money while you are still alive.
When you pass away, any loan you borrowed from the cash value (including interest) will be deducted from the death benefit, and the remaining amount will be paid to your beneficiaries.
Since whole life policies offer both cash value growth and a death benefit, their premiums are generally higher than those of term life insurance policies.
But then again, term life insurance only provides temporary protection, while whole life insurance offers a guaranteed death benefit.
For more information regarding the differences between each policy, feel free to check out our blog on Term Life Insurance vs. Whole Life Insurance to answer any key questions.
Buying a policy may seem overwhelming, but trust that once you’ve understood what it is and how it works, you will become more confident in your decision.
Key Terms You Need To Know
To fully understand whole life insurance, it's helpful to be familiar with the following terms.
1) Surrender
When you cancel your policy, it’s known as surrender.
This means that if your policy has built up cash value, you can cash it out, but your life insurance coverage will be immediately terminated, and your beneficiaries will not receive a death benefit.
But do note that you typically owe taxes on the cash value growth (the amount your cash value has earned over the years).
2) Paid-Up Additions (PUAs):
Paid-up additions enable policyholders to increase their policy's death benefit and cash value without increasing their base premium payments. You can also use extra money (such as your dividends) to buy mini whole-life policies inside your main policy.
3) Riders
Riders are additional benefits that you can buy and add to your insurance policy. If applicable, riders can be customized and offer you several kinds of protection. But they do come with additional costs.
An easy way to think about riders is to place yourself in Chipotle
Term Life Insurance = Bowl
Whole Life Insurance = Burrito
Life Insurance Riders = Ingredients
Though there are several types of riders, the most common ones include:
Waiver of Premium: If the insured becomes permanently disabled or loses income due to injury or illness, the rider exempts their premiums, keeping the policy active.
Accelerated Death Benefit (ADB) / Terminal Illness: If the insured gets diagnosed with a terminal illness, they can access a portion of their death benefit early.
Guaranteed Insurability Rider: The rider allows the insured to buy more life insurance later without a medical exam, regardless of health changes.
Cost of Living Rider: The insured’s death benefit automatically increases to keep up with inflation.
Term Life Conversion: The insured can change their term life policy into a permanent life policy, without a medical exam.
4) Death Benefit: The sum of money paid to your beneficiaries upon your death.
5) MEC (Modified Endowment Contract):
A life insurance policy becomes an MEC if you overfund your policy too fast. Although your death benefit your family would receive will remain tax-free, you will lose all tax benefits. So, any withdrawals or loans you take out will be taxed just like funds from a retirement account.
Whole Life Insurance: Myths and Benefits
Common Myths
Myth #1: Whole Life Is the Best Way to Support Your Family
Whole life insurance isn’t the only best option for families to consider for protection. Most families are better off with term life insurance, which provides ample coverage in case the unexpected happens while being more affordable.
For instance, a 20-year term life insurance policy for $500,000 may cost around $500 to $700 per year, depending on the insurance company.
Conversely, with a whole life insurance policy for the same $500,000 coverage could cost between $10,000 and $15,000 per year.
With the money you save from choosing term life insurance, you can focus on paying down your mortgage, saving for retirement, or even going on a vacation with your family.
It’s all about selecting the options that work best for you and your family.
Myth #2: Whole Life Insurance Is the Best Permanent Coverage
Whole life insurance is the simplest permanent coverage, but there are alternatives to it as well.
One of them includes Guaranteed Universal Life (GUL). This option is a great way to ensure a death benefit for your loved ones, and most importantly, it is budget-friendly. However, the trade-off is that it does not build up significant cash value like whole life insurance does. If your primary goal is to offer lifelong protection without the savings component, GUL can be a suitable choice.
Another option is the Life Insurance Retirement Plan (LIRP), which provides permanent life insurance coverage. Similar to whole life insurance, your death benefit lasts for your entire life, as long as the policy is properly funded. Additionally, you can use the savings from a LIRP to supplement your retirement plan. We’ll explain how this works in the next section.
Myth #3: Whole Life Is a Great Investment
It's easy to get excited about the cash value component of whole life insurance, but whole life insurance is not designed to be used as an investment tool.
While whole life insurance includes a built-in savings feature that allows cash value to accumulate over time, the growth is typically slow and can be expensive.
You can access this money through loans or withdrawals. However, labeling it as a “great investment” may be misleading. When we think of "investments" like stocks, bonds, or mutual funds, we usually expect significantly higher returns over the long term.
Whole life insurance may offer stability and protection, but it generally shouldn't be your primary choice for investing.
Myth #4: Whole Life Protects Your Money from Creditors Everywhere
It's important to understand that each state has its own laws regarding the protection of assets.
For most states, the cash value of life insurance policies is protected, though this protection can vary significantly from one state to another.
Unlike the retirement accounts such as 401(k)s and IRAs, which typically have much stronger federal protections against creditors, in many states, only a small portion of your cash value is protected.
Before considering a whole life insurance policy for creditor protection, be sure to review your state's specific laws or consult with a financial planner.
Myth #5: If It's Good for the Wealthy, It's Good for Me
Never buy a policy based on this belief. You should be aware that everyone’s financial needs and motivations are unique.
Wealthy individuals often use whole life insurance as part of estate planning, business succession, or asset protection strategies, depending on their needs.
For most families, more straightforward and affordable options, like term life insurance, 401(k)s, IRAs, or traditional investment policies, are sufficient to provide security and build wealth.
Whole life insurance can be a valuable tool, but only if its additional cost and specific benefits align with your long-term needs.
Benefits
Now that we’ve cleared up the common myths and drawbacks of whole life insurance, let’s discuss the benefits too…
Permanent Coverage: As long as you continue to pay your premiums for a certain period, your beneficiaries will receive a guaranteed death benefit if something were to happen to you.
Fixed Premiums: With whole-life policies, your monthly payment stays consistent throughout life, so you don’t have to stress about budget changes or unexpected increases in prices.
Cash Value: Whole life insurance comes with a savings component, known as "Cash Value," which grows over time at a guaranteed rate and can be accessed or withdrawn during your lifetime. This growth is usually tax-deferred, meaning you don't pay taxes on the interest as it grows.
Loan Access: You can borrow against the cash value in your policy. These policy loans can help you in case of emergencies, college tuition, or other needs. If the loan is not repaid before your death, the amount gets deducted from your death benefit.
Dividends: If you buy your whole life insurance policy from a mutual fund company, you may receive annual dividends.
Financial strategies: Many individuals use whole life insurance in their broader financial strategies, including:
Infinite Banking: Allows you to borrow against the policy's cash value to fund significant investments.
Retirement Income Planning: Whole life policies can be used for retirement planning, as they accumulate cash value that can be borrowed against during retirement.
Estate Planning: The cash value from a whole life policy can help cover estate taxes, preventing heirs from needing to sell family businesses or properties.
Asset Protection: Many professionals rely on whole life insurance to protect their cash value from lawsuits or creditors.
Business Succession Planning: Business owners often acquire life insurance to protect their companies if a partner or owner passes away.
Life Insurance Retirement Plan (LIRP)
What is a Life Insurance Retirement Plan (LIRP)?
A LIRP, or Life Insurance Retirement Plan, is a life insurance policy specifically designed to help you build tax-free retirement savings. Unlike typical life insurance policies, such as whole life or term life, which prioritize death benefits, the main focus of an LIRP is to maximize cash value growth.
A piece of advice: When setting up a LIRP, it's recommended to purchase the smallest policy available and contribute as much as possible to maximize cash.
Here's how a LIRP works and what it offers:
Premium Payments: You pay premiums for your life insurance retirement plan, and a portion of that payment goes into a cash value savings account, allowing it to grow tax-deferred.
Cash Value: There is no limit to how much you can contribute to your policy. You have the option to overfund your cash value for higher returns in the future, or you can take out a loan against your cash value.
Withdrawing Cash Value: You can also withdraw directly from the cash value savings account. When you withdraw funds from your LIRP, those distributions will be tax-free and will not contribute to your provisional income. So, your Social Security will not be taxed.
KEY BENEFITS
1) Tax-Free Withdrawals: You can access the cash value of your policy through loans or withdrawals without incurring taxes, as long as you adhere to IRS guidelines.
2) No Income Limits: Anyone can purchase a policy, regardless of income level. Whether you earn $50,000 per year or $1 million, you can still contribute to a Life Insurance Retirement Plan (LIRP).
3) No Contribution Limits: You have the flexibility to contribute as much money as you wish to your savings account.
4) Legislative Protection: Existing LIRP policies are “grandfathered,” meaning they are safeguarded from new laws or tax changes.
5) Multiple Accumulation Strategies: With a LIRP, you can grow your money in three ways:
Insurance Company Portfolio: Invest your premiums within the insurance company to earn steady returns that can help cover expenses and costs.
Stock Market: Invest in stock market mutual funds through the insurance company. Although this approach may offer higher returns, it is a much riskier investment.
Indexed Account: Invest in an indexed account. Your money grows based on a stock market index, such as the S&P 500. If the market is struggling, you won’t gain any value, but you also won’t lose any. Generally, investing in these accounts is considered safe and offers moderate returns.
6) Life Insurance for Long-Term Care: A LIRP provides two benefits in one: it offers lifelong coverage and allows you to access a portion of your death benefit early to pay for long-term care expenses, such as nursing homes, or to help cover a mortgage.
Common Questions Answered
Whole Life Insurance
Can I add or remove riders from my whole life policy after I buy it?
Most riders (such as Waiver of Premium or Accelerated Death Benefit) can be added when you purchase the policy or sometimes later, depending on the insurer and your health at that time.
Removing riders is generally easier. Since riders come with additional costs, removing or temporarily disabling them can reduce your premium.
What happens if I stop paying premiums after years of owning a whole life policy?
If you stop paying your premiums without taking further action, your policy may lapse, resulting in the loss of both your coverage and any accumulated cash value. Most policies offer a grace period following a missed payment; however, once this period expires, the policy is forfeited.
If you no longer need the policy, it is best to surrender it to receive the accumulated cash value. Although this means you would lose your lifetime coverage, you could use the cash value to purchase term life insurance instead.
What happens if I pay my premiums early or overfund the policy?
If you pay too much into a whole life insurance policy, you risk your policy becoming a Modified Endowment Contract (MEC).
As mentioned, a MEC can affect how your policy is taxed. The death benefit your family would receive will remain tax-free. However, you will have to pay taxes on your cash value each time you withdraw or take a loan.
Life Insurance Retirement Plan (LIRP)
What if I go through difficult times and can’t fund my LIRP for a while?
If your Life Insurance Retirement Plan (LIRP) has built up enough cash value, you can access that cash to pay for your policy or any other expenses.
You can also temporarily stop making contributions without canceling your policy. However, if your cash value runs out and you don’t resume payments, your policy can be canceled.
If I get a big bonus from work, can I just drop it all into my LIRP?
You can contribute extra funds to your LIRP; however, the IRS does impose limits on how much you can contribute in a given period.
Similar to whole life insurance, if you contribute too much at once, your policy may become a Modified Endowment Contract (MEC), locking your policy’s contribution or preventing you from contributing later.
What happens if I take too much out of my LIRP through loans or withdrawals?
If you borrow too much or withdraw more than your cash value can support, there may not be enough cash left to cover the cost of insurance and policy fees. This could lead to the cancellation of your policy and a loss of coverage.
Additionally, if your policy is canceled while you still have outstanding loans or withdrawals, the IRS may tax you heavily on the money you have taken out.
Ready for the Next Move?
Whether you are looking for lifelong coverage, maximizing cash value growth, or solutions for estate and business planning, there is a whole life insurance option for you.
For any questions or to explore your options further, feel free to fill out the form below.
