Are Whole Life Insurance Polices Worth The Cost?
Imagine cradling your newborn baby for the very first time, those first cries, those first sweet giggles, and the way those tiny fingers curl around yours.
It changes everything. The way you live, how you perceive life, and what you prioritize. You feel a sense of love and warmth that you never felt.
In that heartfelt moment, a thought suddenly crosses your mind: “I need to protect you.”
That's when you start to consider all the "what ifs."
“What if something were to happen to you?”
Will your child have everything needed for a beautiful, joyful life? Will your spouse have the financial security she needs? Will they be able to make all plans come to life?
Now, your life isn’t just about you anymore. It’s about ensuring they have the essentials to live a happy and fulfilling life.
And that’s where life insurance comes in, a perfect way to keep those tiny fingers protected even when you are not around.
While there are various types of life insurance, this blog will focus on whole life insurance, which, unlike others, grows with your family and provides lifelong protection.
This blog exists to be your simple guide to understanding everything about whole life insurance.
So, you can secure your family’s future and a good night's sleep knowing that your family will be safe if the unexpected happens.
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 a permanent life insurance policy that provides a lifetime coverage, as long as premiums are paid.
It is an individual life insurance policy that
Covers you for your entire life
Pays a guaranteed death benefit
Builds cash value over time
With whole life insurance, you are guaranteed a death benefit as well as a cash value savings component. To keep your policy and coverage active, you pay premiums (monthly or annual payments) for a certain period, depending on your policy.
Its sole purpose is to provide your family with the long-term protection needed and act as a savings account. And when you care for it by paying your premium and repaying your loans, it will protect what matters the most to you for a lifetime.
The longer the duration of your whole life insurance policy, the lower the premiums will be.
As the years go by, the policy accumulates cash value.
Now, what exactly is cash value?
When you purchase a whole life insurance policy, a portion of your premium goes toward the death benefit, and another part goes into a savings component known as cash value. This cash value is money you can access 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 beneficiary.
This mix of lifelong protection and growing cash value makes whole life insurance a smart choice for planning your estate, building wealth, and ensuring your loved ones are cared for.
Since, Whole life policies offer both cash value growth and a death benefit, so their premiums are generally higher than those of term life insurance policies.
Unlike term life insurance which only pays out the death benefit if the insurer dies within a certain time frame, usually 10, 20, 30., whole life insurance offers a guaranteed death benefit for the entire lifetime of the insured.
For more information on Term Life Insurance vs. Whole Life Insurance, click this link!
This all may seem overwhelming, but trust that if you understand what it is and how it works, you will become more confident in your decision.
So, let's break it down in the simplest possible way.
Key Terms You Need To Know
To fully understand whole life insurance, it's helpful to be familiar with some key terms
1) Surrender
When you cancel your whole life insurance policy, it’s known as surrender.
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.
Important note: You’ll typically owe taxes on the cash value growth (the amount your cash value has earned over the years).
For example:
If you paid $15,000 into your policy and it grew to $20,000, you would likely pay taxes on the $5,000 of growth when you surrender the policy.
2) Paid-Up Additions (PUAs):
Paid-up additions enable policyholders to increase their policy's death benefit and cash value without increasing their regular premium payments.
You can also use extra money (such as your dividends) to buy mini whole-life policies inside your main policy. These little additions help your cash value grow faster, and your death benefit gets bigger without increasing your base premiums.
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.
It is important to know that riders come with additional costs; however, the costs are relatively lower.
An easy way to think about riders is to picture 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, this rider waives premiums. Your life insurance policy, regardless, stays active.
The rider exempts the insured from paying until they are ready to work again. This can be a great add-on n especially if the premium on the policy is high.
Accelerated Death Benefit (ADB) / Terminal Illness:If you get diagoned of a terminal illness, you can access a portion of your death benefit early.
Guaranteed Insurability Rider: This rider allows you to buy more life insurance later without a medical exam, regardless of health changes.
Cost of Living Rider: This automatically incraeses your death benefit to keep up with infialtion.
Term Life Conversion: Allows you to change your term life policy into a permanent lofe policy without a new medical exam.
4) Death Benefit: The sum of money paid to your beneficiaries upon your death. This amount is typically income tax-fre
5) MEC (Modified Endowment Contract):
A life insurance policy becomes a MEC if you over fund you policy too fast. When that happens, it can affect how your policy is taxed. The death benefit your family would receive will remain tax-free. However, you will lose all tax benefits.
Why it’s a tax trap:
If your policy is a MEC, any money you take out (like loans or withdrawals) is taxed just like a retirement account.
Whole Life Insurance: Myths and Benefits
Common Myths
Myth #1: Whole Life Is the Best Way to Protect Your Family Before Retirement
Although this is true, there are various other options families can consider for protection after retirement. Most families are better off with term life insurance, which provides ample coverage in case the unexpected happens while being more affordable.
For example, a 20-year term life insurance policy for $500,000 may cost around $500 to $700 per year, depending on the insurance company.
On the other hand, 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 matter most to you and your family now.
Myth #2: Whole Life Insurance Is the Best Permanent Coverage
Whole life insurance provides lifetime coverage, but it's not the only option available, nor is it always the best fit for every family.
One alternative is Guaranteed Universal Life (GUL), which also lasts your entire life and is budget-friendly. This option is a great way to ensure a death benefit for your loved ones. 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. 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 exactly how this works in the next section.
Let's not forget term life insurance. Many new families or those just starting out may opt for term life insurance, as it is significantly more affordable and covers you for a specific period.
Ultimately, the best option depends on your financial needs and long-term plans, and the right choice will vary for each family.
Myth #3: Whole Life Is a Great Investment
It's easy to get excited about the cash value component of whole life insurance, but it's important to note that whole life insurance is not designed to be used as an investment.
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 safety, 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.
Every dollar of your family's finances is valuable, and in some 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 whole life insurance for creditor protection, be sure to review your state's specific laws and consult with a financial planner.
Myth #5: If It's Good for the Wealthy, It's Good for Me
It’s important to recognize 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 financial 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 financial goals and needs.
Benefits
Now that we have discussed the myths and drawbacks of whole life insurance, it is also important to know its benefits to understand if it truly works for you and your family.
Permanent Coverage: One of the most significant characteristics of whole life insurance is that it lasts your entire life. As long as you continue to pay your premiums for a certain period, your coverage remains active, providing you with a guaranteed death benefit for your beneficiaries (your loved ones) if something happens to you.
Fixed Premiums: With whole-life policies, you have the same monthly payment for life. This can be extremely helpful for budgeting and being relieved of escalating costs in the future.
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.
Guaranteed Growth: Whole life insurance policies guarantee that the cash value component grows at a fixed rate set by the insurance company. 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 some mutual fund company, you may receive annual dividends. You can use these dividends as a way to boost your cash value, lower your premiums, or withdrow them as cash.
Financial strategies: Many individuals use whole life insurance into their broader financial strategies, including:
Infinite Banking: This approach 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. This account can grow over time, 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 to allow your money to grow at a faster pace with a higher return in the future. You can take out a loan against your cash value any time you need to make a larger purchase.
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. This allows you to use your money during retirement or for other needs without tax implications.
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: You can invest in stock market mutual funds through the insurance company, which may offer higher returns but come with increased risk.
Indexed Account: Your money grows according to a stock market index, such as the S&P 500. If the market is struggling, you won’t gain anything, but you also won’t lose any value. This option is considered safe and offers medium 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. It also ensures that your family receives the necessary care or providing them with a death benefit when needed.
Common Question 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. However, adding them later may require a medical record and the approval of your insurer.
What happens if I stop paying premiums after years of owning a whole life policy?
If you stop paying premiums without taking further action, your policy will lapse, meaning you will lose coverage and any accumulated cash value. Most policies have a grace period after a missed premium payment, but once that period is over, you lose the policy.
If you no longer want the policy, it is best to surrender it to receive the accumulated cash value, although you will lose future coverage. You can use that 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 by making large early payments or by overfunding the cash value, 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 lose the tax advantages on loans and withdrawals.
With a MEC, you will have to pay taxes on your cash value each time you withdraw or take a loan from it, similar to a retirement account.
Life Insurance Retirement Plan (LIRP)
What if I run into hard 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 and other expenses.
You can also temporarily stop making contributions without canceling your policy. However, it's important to note that if your cash value runs out and you don’t resume payments, the policy could be canceled, resulting in the loss of coverage and tax benefits.
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, and a key feature of this plan is that there are no contribution limits.
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), which would cause you to lose its tax-free loan benefits.
Therefore, it’s important to remember that overfunding too quickly can lock your policy’s contribution or prevent you from contributing more 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 cancels while you still have outstanding loans or withdrawals, the IRS may tax you heavily on the money you took out.
Bottom Line: Finding the Right policy for you
Choosing the best whole life insurance policy depends on your unique financial goals, budget, and long-term needs.
Whether you are looking for lifelong coverage, opportunities to maximize cash value growth, or solutions for estate and business planning, there is a whole life insurance option for you.
Ready to find the right policy for your future? Speak with a licensed insurance advisor today to explore your options for Whole Life insurance and Life Insurance Retirement Plans (LIRPs).
Simply fill out the form below.
