So you’re wondering whether to get whole life insurance even though it costs much more than term life insurance. In this guest post, our partner Policygenius shares the main reasons to get whole life insurance.
Whole life insurance is permanent coverage that lasts your entire life. If you have strong disposable income and are looking for extra ways to invest, it can double as financial protection for your family and a low-risk savings or investing vehicle throughout your life.
Here’s how whole life insurance works. In exchange for premiums, your insurance company pays out a tax-free death benefit to your loved ones when you die. Most whole life insurance policies also include a cash value savings component. This comes with added financial benefits you can use throughout your life.
Whole life insurance is not the most popular type of life insurance. Term life insurance is usually the better choice for most people due to its simplicity and affordability. However, it’s helpful to learn about the circumstances that can make whole life insurance a better choice.
Whole Life Insurance Quick Facts
When You May Want To Get Whole Life Insurance
Below are the circumstances where getting while life insurance instead of term life insurance may be more appropriate.
1) You’re a high-net-worth individual with a large estate
When your estate exceeds $12.06 million per person or $24.12 million for married couples, you have to pay the federal estate tax when you die. The tax rate will likely be 40%. The exemption amount is lower in some states and Washington D.C.
“Estate taxes eat away at what you can give to your children when you’re gone,” says Policygenius Sales Operations Manager Anthony He. Instead of your heirs paying that tax out-of-pocket, you can set up a whole life insurance policy that can be used to pay the estate taxes when you’re gone.
Beyond funding estate taxes, high-net-worth individuals can use a whole life insurance policy to transfer wealth without increasing their taxable estate. In other words, your whole life insurance benefit can go directly to your beneficiaries (tax-free) without the added stress or complication of probate or other legalities.
2) You’re saving for retirement and maxed out other accounts
High-net-worth individuals who have maxed out retirement savings due to 401(k) and IRA income caps can also benefit from a whole life insurance policy.
Whole life insurance should never be your primary retirement savings vehicle. But, it can supplement a robust retirement plan if you’ve maxed out other options. Whole life is a low-risk alternative to add more to your savings and accumulate tax-deferred growth.
A whole life insurance policy’s cash value grows steadily over time, typically at a lower rate than investments in the stock market or mutual funds. These lower interest rates (returns) may seem like a negative. But, they can be more stable and less volatile than the cash investments for your 401(k) or other retirement accounts.
If you retire and the market is having a down year, pulling out cash from your whole life policy can be a decent alternative.
3) You’re a parent buying life insurance for your children
Parents with tremendous disposable income can consider buying whole life insurance for their kids. It’s a similar idea to opening up a custodial Roth IRA or making any investment while your children are still young. A whole life policy with a cash value component will have a greater amount of time to compound.
“Whole life insurance for children is like a financial head start. When a child eventually becomes financially independent, the parents can transfer ownership of the policy along with any accumulated cash,” He adds.
Two major benefits to buying whole life insurance for your child are time and money. While it takes a long time – sometimes 10 years or more – for the cash value of a whole life policy to accumulate, by purchasing life insurance for your child when they are younger, time is on their side.
The policy will have compounded interest by the time they finish school compared to a policy purchased later in their life. Once the cash value accumulates, your child can take out a policy loan against it. Or they can use the reserves to pay premiums, or surrender the policy for cash if they no longer need it.
Life insurance prices increase as we age. “Whole life insurance is an afterthought if purchased too late,” He says. Purchasing life insurance for a young child locks in a lower price for a permanent policy. It won’t get more expensive over time.
4) You’re a caretaker of a lifelong dependent
If you care for an aging parent, adult, or a child with a disability who needs lifelong financial support, whole life insurance can be a great option because it will never expire. Roughly 15% of the world’s population has some sort of disability.
By naming your dependent, a trust, or another caretaker as the beneficiary, you can ensure your loved one gets the support they need. Naming a trust or caretaker as your whole life policy beneficiary is best if your dependent is unable to manage their own finances. Or if your child is under the age of majority in your state, which can complicate the payout process.
5) You own a business with a buy-sell agreement
Key person insurance is life insurance for an executive member of a business. The business is the beneficiary and pays the premiums. Key person insurance is recommended for business owners, CEOs, and business partners whose deaths would negatively impact their businesses.
To fortify this type of life insurance, buy-sell agreements are a must for business owners and partners. This type of agreement sets the price, conditions and terms for any remaining business partners to buy the deceased (or exiting) partner’s shares if anything happens to them.
A whole life insurance policy can be used to fund a buy-sell agreement. This allows the remaining business stakeholders or partners (including surviving family members unrelated to the business operations) to use the death benefit to purchase remaining shares upon the death of the insured and avoids the use of out-of-pocket cash.
This type of policy can get complicated. It should be set up in coordination with a professional financial planner and your licensed life insurance agent.
6) You’re an adult with disabilities
A whole life policy is also a good option for adults who have a disability or medical condition that is likely to worsen with age. This is especially true if you know you’ll have financial dependents into retirement and beyond. Whole life insurance ensures lifelong coverage and stable premiums regardless of advanced medical needs.
If you have or are expecting a child with significant disabilities, a whole life insurance policy might be vital. Some children require care for the rest of their lives and it can get very costly.
7) You want life insurance that never expires
Whole life insurance is great for people who prefer a “set it and forget it” approach to financial planning. And, it avoids the stress of having to go through medical exams and underwriting at an older age. In addition, you can also set up convenient, automatic premiums so you never miss a payment.
For those who have term life insurance policies, you need to keep track of when coverage expires. You can always convert your term life insurance policy to a whole life insurance policy to keep your health rating. However, it is just another process you need to go through.
Personal Thoughts On Whole Life Insurance
In retrospect, I probably should have gotten a whole life insurance policy when I was 30, the best age to get life insurance. Back then, I had a lot of disposable income working in finance. Further, I had the highest health rating, which would have locked me in at the lowest premium for life.
If I had gotten a whole life insurance back in 2007, its cash value would have grown tremendously by now. Further, I wouldn’t have had to go through the process of finding a new life insurance policy.
In January 2013, before I had two children, I erroneously took out only a 10-year term policy. The idea was to cover me until my primary mortgage was paid off. But I didn’t anticipate having two children.
Now that I’m a father who has to think about estate planning, having a whole life insurance policy with a large cash value would have been nice. Alas, I can’t change the past. My 20-year term life insurance policy I just got through Policygenius will have to do. It covers our kids until they turn 22 and 25. By then, I hope they will have the maturity to build their own wealth.
I plan to consistently save and invest the difference between the whole life premiums I would have paid and the term life premiums I’m currently paying. Most of the investing will go towards funding both children’s 529 plans. The rest will go to real estate.
A term life insurance policy is likely the best solution for most people. However, there are certainly good reasons to get a whole life insurance policy as well.