If you’ve been shopping for life insurance, you’ve probably come across whole life policies. Also known as permanent life insurance, this type of policy lasts your entire life and pays your beneficiary when you die.
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In addition to serving as life insurance, whole life also accumulates cash value. A portion of your premiums are invested and earn a guaranteed rate of return. You can get a loan against your policy’s cash value or simply cash it out and cancel the policy. That’s why agents who sell whole life insurance normally present it as a combination between life insurance and an investment.
But take it from finance personality Dave Ramsey — that isn’t a good combination. In fact, he says that life insurance agents “got in the investment business because they figured out it was a way to screw people.” It may sound like an extreme stance, but Ramsey’s advice on whole life insurance is on the money and worth heeding.
Why Dave Ramsey hates whole life insurance
The glaring problem with whole life insurance is the cost. It’s significantly more expensive than the alternative, term life insurance. That’s life insurance you buy for a set time period, most often ranging from 10 to 30 years. For an example of the cost difference, here are quotes from Forbes Advisor for a 30-year old male to purchase $500,000 in life insurance coverage:
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- Whole life: $360 per month
- 20-year term life: $19 per month
- 30-year term life: $30 per month
- As you can see, that’s a massive difference. Whole life does have its advantages. Unlike term life, whole life never runs out, and it builds cash value. But are those benefits worth the much higher price tag? Probably not.
Life insurance agents love to mention the guaranteed rate of return you get with whole life insurance. Ramsey correctly points out that your policy’s cash value actually grows very slowly. The average annual return on a whole life policy is 1.5%, according to Consumer Reports. To be blunt, that’s terrible compared to the stock market, which has an average annual return of 10% over the last 50 years.
Let’s say you’re debating life insurance options at the costs provided above. You could pay $360 per month for whole life or $30 per month for 30 years of term life insurance. You decide to go with term life and invest that $330 difference in the stock market, earning a reasonable 8% annual return.
After 30 years, you’d have $484,490. The cash value on a whole life policy almost certainly wouldn’t be anywhere near that.
And here’s what Ramsey calls one of the worst parts of whole life insurance — there’s no getting both the death benefit and the cash value of your policy. When you die and the insurance company pays the death benefit, it keeps your policy’s cash value. Or, if you cash out your policy, then there’s no death benefit.
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Stick to term life insurance
In all likelihood, term life insurance will be a much better financial decision for you. Most people don’t need whole life insurance, because they don’t need life insurance forever.
Life insurance is a must when you have people depending on you financially. If you’re 35 years old with a spouse and a toddler, then a 20- or 30-year term life policy would protect them if tragedy strikes. You could get a policy for $500,000 or $1 million at a reasonable monthly cost and know they’ll have a financial cushion in a worst-case scenario.
But there comes a point when you don’t have people depending on you financially, and when you’ll also have likely saved a large nest egg. For example, if you’re 65 years old with adult children and $1 million in your investment accounts, you probably don’t need life insurance anymore. That’s why an affordable term life policy is usually better than an expensive whole life policy.
Unless you’ve carefully analyzed it and determined that a whole life policy is a better fit, go with a term life policy from one of the best life insurance companies. Invest your money well, and you’ll have an ample nest egg by the time your life insurance policy ends.SPONSORED:
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