Expert opinion: Is whole life insurance a good investment?

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What is whole life insurance?  

There are a lot of options for people looking for life insurance. There are term life and permanent life insurance policies, including whole life and other insurance types.

Whole life is one of the more popular varieties of life insurance, but people often have questions about what these policies are and if they’re the right policy to buy. Let me first define what whole life insurance is and then answer some basic questions about this type of insurance.

Whole life is a type of cash‑value life insurance with an investment-like component called the cash value. The cash value is required by regulation to predominantly be invested in high-grade bonds and government-backed mortgages. It grows over time at an annually declared dividend interest crediting rate — for example, like how banks declare the rate on a 1-year Certificate of Deposit. 

These policies also have a fixed premium calculated by the insurance company. As long as those premiums are paid, either by the policyowner or by excess policy account values, the insurer will pay out the death benefit when the insured passes away. This premium is not the cost of the insurance and instead is the amount that needs to be paid by the policyowner to guarantee that all internal costs of insurance and policy expenses due over the life of the policy will be covered. 

Now, let me answer some frequently asked questions about whole life insurance:

What is the difference between whole life and term life?  

Premiums – the amount you pay for your insurance – for both whole life and term life are set by the insurer, but that’s where the similarities end. The differences between whole life and term life include the duration of coverage and whether or not the policy offers a cash value account. Whole life provides lifelong coverage and includes a cash value account, whereas term life provides only protection against premature death for a specified term‑of‑years without a cash value account. 

Are whole life policies all the same?

There are various types of whole life policies that are distinguished principally by these factors: 

• The premium payment plan
• Whether premiums and death benefits are fully‑guaranteed
• Whether the policy participates in the insurer’s claims experience, operating experience, and investment experience
• Whether the policyowner needs to medically qualify for coverage
• Whether the policy is designed to provide just life insurance, or some other type of coverage in addition to life insurance, or for a specific group or purpose.  

For instance, premiums for most whole life products are level and payable for life, whereas other types of whole life are designed to be paid up over some limited number of years or even with a single payment.  

Also, some whole life policies combine whole life and term life, in which case premiums and death benefits are only guaranteed for the whole life portion of the policy. Finally, some whole life policies are designed to provide other benefits like long-term-care insurance or coverage for specific groups or purposes such as: 

• Newborns
• Particular associations
• Specific purposes like accidental death and dismemberment (AD&D) and long-term-care (LTC)
• Debt and mortgage protection
• Final/funeral expenses
• Estate Taxes

Who offers whole life insurance?

Among the companies selling whole life policies:

• CUNA Mutual
• Gerber Life
• Guardian
• MassMutual
• Mutual of Omaha
• New York Life
• Northwestern Mutual
• OneAmerica Financial
• Penn Mutual
• State Farm

Insure.com ranks the best whole life companies, which you can find here. 

How much does whole life cost?  

Like all forms of life insurance, the cost of whole life includes the cost of insurance, fixed administration expenses, and premium loads for state and federal taxes and sales loads. These costs are generally not disclosed in whole‑life type products and vary by age, gender, health‑risk qualification, tobacco use, commission concessions/discounts, and face amount. 

As such, you will often need to request such cost disclosures. If you don’t get these cost disclosures, click here to connect with a Veralytical advisor near you who will provide independent verification of low costs and good performance at no cost.  

Is whole life a good investment?  

A good investment is any financial instrument, product, or vehicle with costs justified relative to the expected benefits. It also has reasonable performance relative to risk tolerance. 

Whole life can be a good investment when the internal policy costs are justified relative to the death benefit payout and/or tax benefits, and when expected performance is reasonable and competitive. Comparing expected policy performance to the historical performance of high-grade bonds and government-backed mortgage asset classes can show whether or not a whole life proposal is reasonable and/or whether an in force policy has competitive performance.  

As such, whole life can be a good investment alternative to bonds, CDs, and other fixed-income investment alternatives for consumers who need life insurance, have a low investment risk tolerance, and are in higher tax brackets. 

Interest income from fixed‑income‑type investments is usually taxed at ordinary income tax rates. Ordinary income tax rates can cause twice as much taxation as capital gains tax rates. But because the interest from bonds and mortgages underlying whole life policy accounts are at least tax‑deferred and can be tax‑free, whole life can be a good investment for consumers in higher tax brackets who have a low risk tolerance and who need life insurance anyway.  

On the other hand, whole life insurance is generally not a good investment for anyone who doesn’t need the financial protection of life insurance in the first place or is in a lower income tax bracket, so the tax benefits are not as valuable. Additionally, it is not a good investment for people who seek the higher returns you would expect from stock-market-type investment vehicles. 

Lastly, a whole life policy with high costs or poor performance would not be a good investment for anyone. Current state regulations permit agents, brokers and insurers to “quote” low premiums while charging high costs. Brokers and agents don’t need to disclose those high costs or the higher risks of “premium calls” for more than the originally “quoted” premium. This can lead to a total loss due to policy lapse even when all “quoted” premiums were paid.  

As such, most whole life “quotes” do not include the information required to determine if whole life can be a good investment. To determine if whole life can be a good investment for you, you must insist that every proposal or recommendation includes independent verification of costs and performance. Click here to connect with a Veralytical advisor who will provide that information at no cost to you.  

Who should get whole life insurance?  

Anyone with a low investment-risk tolerance, a long-term need for cash triggered by premature death, or seeking additional vehicles for tax-favored investments should consider whole life insurance. 

For instance, parents who have a special‑needs child or a lifelong dependent should consider whole life. 

Business owners working with non‑family members or business owners working with some but not all family members should also consider whole life if they want the business to stay with those originally involved while balancing inheritances to those not involved. 

Wealthy individuals whose wealth includes a family‑owned or closely‑held business or other illiquid‑type assets or who don’t want the U.S. government to be the primary beneficiary of their estate should consider financing estate taxes with whole life insurance. 

Lastly, individuals in higher tax brackets with a lower risk tolerance seeking additional vehicles for tax-favored investments, particularly those who have maxed out their 401(k) or other retirement accounts, should consider whole life insurance.

Barry Flagg

Expert Advisor

 

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Barry D. Flagg is the inventor and founder of Veralytic®, the leading online publisher of life insurance pricing and performance research and product competitiveness ratings. Veralytic is the result of his unique background in both the fiduciary investment business where he became the now oldest, youngest Certified Financial Planner (CFP®) in history, and as a life insurance expert consistently recognized in the top 1% of the industry. He’s renowned for applying Prudent Investor Principles to life insurance product selection or retention and portfolio management. As a result, he serves as sub-advisor to thousands of irrevocable life insurance trusts (ILITs) as well as RIAs and wealth managers, is a regular contributor to Forbes for articles about life insurance, leads curriculum development and instruction for Applied Fiduciary Practices involving life insurance for The Center of Board Certified Fiduciaries at Wake Forest University, and serves as a volunteer to the CFP Board Professional Standards and Legal Department for complaints involving life insurance. Barry has authored numerous articles for national publications on managing life insurance as an asset according to established and proven asset management principles and frequently teaches continuing education courses about the same to attorneys, CFP®s, CPAs, and CTFAs.