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Whole life insurance is a great investment–for the insurance agent who wants to sell it to you. If he can get you to believe that it would be a good investment for you, he will be a richer man by far. For you, trusting life insurance as something that can help you out when you retire, or to borrow against now, is a bad idea according to many financial experts. Life insurance provides for your burial and financial needs for your loved ones, if you die, but is not a good investment.
Suze Orman, Dave Ramsey, and many other financial experts are against whole life insurance period. Many would support term life insurance instead. They are especially against it as an investment.
What exactly is whole life insurance? What is term insurance? Why are some financial experts so against whole life insurance period and especially against it as an investment?
Whole life insurance, which is also called permanent insurance and universal insurance, is insurance that will cover you for the rest of your life. Term insurance will cover you for a particular number of years–such as 5 to 30. The premiums with term insurance usually will remain the same for the term of the insurance. If you want insurance after that period of time, however, you can expect your rates to go up. With whole life insurance a portion of your premium will go toward the insurance cost of the death benefit. Another portion will go toward the savings in your policy. That money will accumulate and increase over time.
Many financial experts, however, say that whole life insurance is one of the worst financial products on the market. That is partially because when a person is younger, he can purchase more insurance for less money by buying term insurance–even though when he gets older his whole life insurance might then be cheaper, as term rates increase at the end of a term.
For example, a 20-year-old man could potentially pay much more per month for whole life insurance of $125,000 than for term insurance. Strictly as an example, let's say the rate for whole life would be $110 per month. By comparison the rate for term might be $20 a month. While in theory, the extra $90 a month in whole life insurance is being saved and could be considered an investment; there is more to the story.
For a short period of years, like maybe three, the $90 will go toward commissions and expenses. After that his policy might earn, depending on the kind of policy, from 2.6% to 7.4% in interest per year.
The catch is when you die; your family will only get the face value of the insurance policy–$125,000. Where does the rest of the money go? The insurance company gets it!
Suppose, however, you borrow against the savings in your life insurance policy. Maybe your sales agent tried to tell you that is why your whole life insurance is a good deal. In an article, Should You Borrow Against Your Life Insurance, on www.helium.com, doing that would be like borrowing against your savings account–except your savings account pays more interest.
According to the article, a life insurance agent will tell you the money in your savings is actually part of your death benefit, so your family is not losing anything when you die. While you can borrow against your policy, if you do so and die before you pay yourself back, your family will not receive as much in death benefits. If you have borrowed $50,000 against a $100,000 policy, your family will receive only $50,000 in death benefits. In other words, you have lost the money you have been paying out.
On the other hand, according to Dave Ramsey's book, Financial Peace University Workbook, imagine the whole life policy would cost $145 instead. If you invested that same amount of money every month from the time you were 30 in a Roth IRA, you would have $133,000 at age 50 and $1,500,00 at age 70. Even if you could not invest the whole amount, because your term insurance would cost $40, how much could you have saved if you would put the $105 difference in an IRA?
According to the website, www.eon.businesswire.com, Orman is well known for advising Americans to buy only term insurance, even though the article itself includes an interview with someone who disagrees with her. She is also known to have publicly said if you want insurance, buy insurance, and if you want an investment, buy an investment–implying that the two don't go together.
There are many in the insurance industry who would disagree with Dave Ramsey and Suzie Orman about the value of whole life as an insurance policy and as an investment. There may be some financial advisors who would. Nevertheless, these two well known financial advisors who have had national radio and television shows and have advised millions, along with many other experts who agree, say to avoid whole life insurance at all costs.
Citations:
Financial Peace University Workbook, by Dave Ramsey, Lampo Press
How-Does-a-Whole-Life-Insurance-Policy Work, James J. Robinson, Ezinearticles.com
The Truth About Life Insurance, No author listed, Daveramsey.com
Should You Borrow Against Your Life Insurance, by Tim Rodemann, Helium.com
Suze Orman of the Suze Orman Show Offers one-size-fits-all Life Insurance Advice, No author listed, Eonbusinesswire.com
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