Many great points and counterpoints. My two points against cash value in general is the monthly cost and the “investment”. Very few people can afford that monthly premium. It is good that you can borrow from the cash value because you will need to at times to make ends meet. Because once you try to make monthly premiums over and over on cash value, you realize the extra $200 to $300 per month that is going out could be in you pocket helping to pay basic living expenses. Then the investment that does have healthy returns. I can look at historical returns for Invesco, American Funds, Fidelity, etc. that go back to the 1960s and 1970s that return an average of 10% + since inception. Why would I pass that up for returns of 5% or lower? Plus, if the policy holder is not careful, their investment can go back to the insurance company. I want my investment to go to me and then my heirs. I strongly oppose cash value as it only benefits a small percentage of the population. The vast majority of the middle class cannot afford it. Once my investments reach a certain amount, I am dropping my term policy because I am now self-insured. Pay as little for insurance(premiums) and get the most coverage (death benefit). If cash value were so good, the investment portion would pop-up in other types of insurance (automotive, disability, etc.) Life insurance is the only type of insurance where it is located and is oversold to so many people that it will not help. Anybody reading the posts in this forum are already doing them selves a service by seeking to understand. Understand that Dave Ramsey and Suze Orman are on the side of the consumers. Base don the tone of my post, you can determine who I sell life insurance for and I am proud to do it. My commission is 1/10 of what a whole life agent makes. Also, we are the only life insurance company that encourages policy holders to drop their policy with us once they have financial independence. Our whole goal is get people out of insurance premiums and direct them to investment vehicles that build wealth. BTID. Buy term and invest the difference.
First, there are your regular whole life policies that are non-{articipating and then there are those that are Participating. Participating policices earn dividends which is called a “return of premium” however with that dividend it purchases more insurance and the coverage keeps going on as long as a dividend is paid, the more coverage the more dividend, the more dividend the more coverage etc. After 25-30 years a person can stop paying for the policy and take reduced paid up insurance and keep the insurance enforced for the rest of their lives without paying a single cent. This is one of the features I absolutely love about participating whole life.
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Now, it turns out that we have higher, broader family obligations than I anticipated 20-27 years ago. My wife and I plan to possibly keep working past 65 (which I hadn’t anticipated) and would like to be able to fund these obligations even if we were to die before our now planned time to stop working (that goes past the periods anticipated by the terms of our term policies). Our term policies and term coverage are beginning to expire and due to certain issues, at best, we would have to pay very high premiums for anything I would try to purchase now, if we would qualify at all.
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I bought a whole life insurance policy for my daughter when she was 4! What a mistake to make! Now that the policy is 21 years old, I am undecided whether to continue paying the annual premium or surrender the policy.I have paid $25,126 over the years, and will walk away with $36,250 if I surrender it now. The policy covers has a $100,000 coverage and the annual premium is now $1179. I would appreciate your advice!

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Universal life insurance is a type of permanent life insurance designed to provide lifetime coverage. Unlike whole life insurance, universal life insurance policies are flexible and may allow you to raise or lower your premium payment or coverage amounts throughout your lifetime. Additionally, due to its lifetime coverage, universal life typically has higher premium payments than term.
1) I believe that when done correctly, it is insurance that CANNOT BE TAKEN AWAY. One of the most important things about whole life is that the annual premium is FIXED at a constant level FOREVER and the death benefit cannot be taken away if you continue paying in (these are the basics but I think worth repeating). I bought my policy at age 32. If I get heart disease, diabetes, or any of thousands of exclusionary conditions over the rest of my life, it does not matter. My insurance will not go away. If you rely on term insurance, then even if you get a 20 year policy as a 30 year old, then at age 50 there is a good chance you will either i) have to pay MUCH higher premiums to continue your coverage or ii) not be able to get coverage at all. It is just like health insurance before ACA. If you think you can keep rolling over term life, you are taking a very big gamble. This is probably fine if you are only insuring to protect your family in your early working years. But if you want to make sure your heirs eventually get a benefit on your death, term life is a bad gamble. Which leads into #2…
4. If you end up wanting permanent life insurance when you get older, you have plenty of options other than buying whole life insurance as an investment when you’re young. You could convert a term policy. You could buy guaranteed no-lapse universal life. There are plenty of options that don’t require you lock yourself into a poorly-performing policy at a young age when that cash flow would be better used elsewhere.

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Naturally, the float method is difficult to carry out in an economically depressed period. Bear markets do cause insurers to shift away from investments and to toughen up their underwriting standards, so a poor economy generally means high insurance premiums. This tendency to swing between profitable and unprofitable periods over time is commonly known as the underwriting, or insurance, cycle.[25]

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Finally, the loan that I mentioned in my above post as interest free and tax free after the 11th year are a little more complicated than a “free loan”. First, the rate may increase in the future (at the discretion of the management) to a max 0.25% so that over time would add up if you took out a loan for retirement and had no intention of paying it back. Also, the loan balance is actually transferred to a loan reserve account where interest is charged at 2%, but at the same time the money in the loan reserve account earns interest of 2% which is credited to the Policy Value. So this is how they achieve an “interest and tax free” loan. I actually did not understand the specifics of this transaction or any IRS consequences that you could potentially have.
Great read (http://momanddadmoney.com/insurance-and-investing-dont-play-well-together/ as well). Really taught me a lot. I’m a growing professional and a ‘friend’ tried to sell me a whole life participating life insurance. Like I believe you mention several times, all the ‘pros’ sounded really attractive. It actually made it sound stupid not to buy it. However, this alone made me hesitate as we all know what usually happens when something is too good to believe. I did a number of searches and read a few articles before stumbling on to yours. Excellently written providing a comprehensive explanation in terms that even a layman (i.e. me) could understand. Thank you as you just saved me from making a very big mistake. I hope others are lucky enough like me to happen upon your article before they make their decisions.
This is a very helpful example of why WL insurance IS a good investment: http://www.mypersonalfinancejourney.com/2013/04/infinite-banking-concept-whole-life-insurance.html. Also, Paradigm Life has several very good models to show how WL policies can out pace “buy term and invest the difference” products long term. One size does not fit all. I have Term Life insurance supplementing my WL policies right now, but they are all convertible. So I will be able to lump in money later and convert them into permanent policies with all of the borrowing and tax sheltered benefits.
Notes No risk of losing coverage, but no cash value when term ends No risk compared to other permanent types, but there are probably better investment options Refunds your premiums at the end of the term if you outlive the policy - Risk of holding expensive insurance policy with little ot no cash value Risk of holding expensive insurance policy with little to no cash value
Any person who uses permanent insurance should be out of debt and have the discipline to maintain a long term approach. There aren’t any get rich quick schemes and any plan can work as long as an investor looks to get the maximum value for the money they pay. Cash Value Life insurance provides values that promises you or I can’t keep unless we partner with one of these companies.
Each type of life insurance product has its advantages and disadvantages. You can’t say term life is the best, whole life is the best or universal life is the best. It depends on what an individual client need and his or her situation. As a client, they should know all the advantages and disadvantages but of course, they are under the supervision of a certain type of insurance agent that can be biased and try to sell what they have to offer to form their companies. Avoid an agent that focuses on selling one type of product. Talk to an agent who can provide the knowledge of each type and you can choose what best for you. 

Good question Steve. The full answer is that I don’t know exactly what options you have and it likely makes sense to talk to a good independent agent. But you are right that it is much harder to find affordable term life insurance as you get older, and in your case some kind of permanent insurance may make sense if you have an insurance need. Just make sure that you are only getting the features you need, and none that you don’t, so that your premium is being used as efficiently as possible. For example, if you are only buying it for the death benefit, do you need the cash value?
Any person who uses permanent insurance should be out of debt and have the discipline to maintain a long term approach. There aren’t any get rich quick schemes and any plan can work as long as an investor looks to get the maximum value for the money they pay. Cash Value Life insurance provides values that promises you or I can’t keep unless we partner with one of these companies.

One other point. You emphasize the “tax free” nature of whole life here. I feel like I was pretty clear about that in the post and would be interested to hear your thoughts. Just blindly calling it “tax free” ignores the presence of interest (on your own money, by the way) which over extended periods of time can actually be more detrimental than taxes. 

Regarding pension vs registered accounts: It is hard to know what is better, relying on your pension or relying on an individually held mutual fund account (or some variation thereof using other securities). This would require a close reading of the pension and securities legislation in your region. For us in Canada, a defined benefit pension (prescribed benefits upon retirement based on a formula where the employer is responsible for funding any shortfall) can be incredibly enticing due to the guarantees attached to them. It is the preferred pension and stacks up really well against defined contribution pensions (where employers match the contributions of employees to at least a certain degree and where the account grows until retirement and the pensioner draws down the account and is burdened with any shortfall) but defined benefit plans are going the way of the dodo over here. It’s still available to government employees but most private employers don’t want to take on the risk of having to meet funding requirements. That’s a huge liability on the balance sheet. In any case, pensions have a few benefits over individual savings vehicles. First, they benefit from reduced management fee pricing, thereby improving returns marginally over the course of fund accumulation. Second, they benefit from a longer investment horizon since they are always looking many years in the future as their pension liabilities are long-term by definition. Third, actuaries are required to evaluate pensions regularly to make sure funding targets are established and followed.
The upshot is that the taxation of a 401(k)/Traditional IRA down the line is often beneficial to being taxed up front. Certainly not always, but often. And in any case, I would challenge you to find a financial planner who does not make money off the sale of whole life insurance who would recommend it as an investment tool before you have maxed out your dedicated retirement accounts.
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The comparison for defined contribution vs registered accounts is easier because you are dealing with account values which you can project with a fair degree of certainty, at least within ranges to which you can apply confidence intervals, to the degree market activity can be reliably subjected to statistics (point of contention: this is debatable…otherwise we wouldn’t have return years with standard deviations of 3+). You just project the accumulation and the withdrawal and see which one runs out of money first, then consider the non-financial issues already discussed above. Comparing defined benefit plans vs registered accounts is a little bit tougher. This is where you might want to bring in your accountant or actuary to do the math. They can provide you with the information you need to make the decision.

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4. If you end up wanting permanent life insurance when you get older, you have plenty of options other than buying whole life insurance as an investment when you’re young. You could convert a term policy. You could buy guaranteed no-lapse universal life. There are plenty of options that don’t require you lock yourself into a poorly-performing policy at a young age when that cash flow would be better used elsewhere.

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With whole life insurance, you can’t just decide to stop paying premiums. Well, you can, but if you do then the policy lapses and you’re forced to withdraw the cash value, which will subject you to taxes and possibly a surrender charge. And if you haven’t had the policy in place for multiple decades, you will also be left with meager, and possibly negative, returns.
One point I would like to counter is the idea that whole life “is insurance that CANNOT BE TAKEN AWAY”. It can be taken away if you are not able to keep up with your premium payments, which is pretty common given that people’s lives and financial situations are constantly changing. With some policies, the premium can even go up depending on the performance of the policy, forcing you to pay more than expected if you want to keep the coverage in place. So it’s not quite as simple as saying that the death benefit is a sure thing. 

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Great article Matt. You provide 8 great reasons as to why whole life insurance isn’t the best option for the majority of people. As you noted, there are times when it is advisable such as if you have a disabled child (also a no-lapse universal life policy is another alternative in this instance), but for most term life insurance and investing the rest is the way to go.

Your comment on term insurance allowing you to convert at anytime is inaccurate. You must read the conversion language as it is designed to protect the insurance company. Met life for example states ” During the conversion period shown in the policy schedule you can convert this policy, while it is in force with all premiums paid, to a new policy–On a plan of permanent insurance, with a level face amount, available on the policy date of the new policy.”. Some term plans won’t let you convert after 10 years or if your over age 65. Imagine having a 20year $1,000,000 term plan and getting cancer in the 19th year. You want to convert but find out the conversion period ended in the 10th year. Also, the company typically determines which plan you can convert to. Maybe its just 2 plans out of the 8 they offer. What is the likelyhood of those being the best 2 plans available? Alas, no one reads the contract or the prospectus for that matter. My dad always said “the big print givith and the small print taketh away.”
Typically, life insurance is chosen based on the needs and goals of the owner. Term life insurance generally provides protection for a set period of time, while permanent insurance, such as whole and universal life, provides lifetime coverage. It's important to note that death benefits from all types of life insurance are generally income tax-free.1
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This brings me to my next point. It is not a bad idea to consider annuitizing a portion of your retirement income. If you can annuitize enough to provide you with funds to meet your income “needs” (spousal annuities are available for lifetime income security) with the remainder invested to provide for your “wants”, you can still have the security offered by a pension without actually having the pension itself.
“Whole life has incredible benefits to protect against life events, I.e. disability…” This is what long-term disability insurance is for. A disability policy will cover all of your living expenses not just your life insurance premiums. It can even cover contributions to an IRA or other retirement savings vehicle. It’s much better and more cost effective true disability protection.
Wow, what a great article, Matt. A couple of nights ago, I was listening to Clark Howard on the radio, and to my dismay, heard him start talking about one of the worst investments for college. He continued, and when he actually said whole life insurance, my heart dropped, because about ten years ago, my wife and I were talked into this “investment” for paying for our kids college.
While you won’t be able to pinpoint the amount you’ll need to the penny, you can make a sound estimate.  Your goal should be to develop a life insurance plan that, following your death, will allow your family to live comfortably without your economic contribution. Also consider the effect of inflation over time. The amount needed for retirement or college 20 years from now is likely to be significantly higher than today.

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Typically, life insurance is chosen based on the needs and goals of the owner. Term life insurance generally provides protection for a set period of time, while permanent insurance, such as whole and universal life, provides lifetime coverage. It's important to note that death benefits from all types of life insurance are generally income tax-free.1
One point I would like to counter is the idea that whole life “is insurance that CANNOT BE TAKEN AWAY”. It can be taken away if you are not able to keep up with your premium payments, which is pretty common given that people’s lives and financial situations are constantly changing. With some policies, the premium can even go up depending on the performance of the policy, forcing you to pay more than expected if you want to keep the coverage in place. So it’s not quite as simple as saying that the death benefit is a sure thing.
Admitted insurance companies are those in the United States that have been admitted or licensed by the state licensing agency. The insurance they sell is called admitted insurance. Non-admitted companies have not been approved by the state licensing agency, but are allowed to sell insurance under special circumstances when they meet an insurance need that admitted companies cannot or will not meet.[39]

The primary purpose of life insurance is to protect the people who are financially dependent upon you. Once those people are no longer dependent upon you (e.g. your kids grow up), you no longer have the need for that protection. Term life insurance is like having car insurance for as long as you own a car. Whole life insurance is like having car insurance forever, even when you no longer own a car.
You can own both whole life and term life policies at the same time. People who are looking at this option typically already have a whole life policy. However, they may find that they want additional short-term insurance coverage such as for 10 years. In this instance, buying a term policy for the amount of life insurance you need for that extra protection can be a good solution.
Your “rent” analogy is a classic one used by life insurance salesmen when selling whole life, but it is a poor analogy. After all, insurance has nothing to do with renting vs. owning. Would you say that most people are simply “renting” auto insurance? Do you think people should buy auto insurance policies that will pay them the full price of a new car whenever their car dies, even if they drive it into the ground? Because that’s essentially what whole life insurance is. The main purpose of life insurance is to provide financially for dependents in the case that you die early, just as the main purpose of car insurance (beyond the liability portion) is to provide the financial value of your car in case it dies early. Once that financial protection is no longer needed, the insurance need is gone. Term insurance protects you while you need it and goes away once you don’t. It is insurance in the purest sense of the word and is by far the more effective way to go about it for the vast majority of the population.
Except for the very wealthy, most people could benefit from a combination of a highly overfunded Whole Life Insurance policy, and a term policy to make up for the difference. For example, let’s say a 25 year old determines that he needs $3,000,000 of insurance. He might purchase a $1,000,000 Whole Life with an annual premium of $12,000, but overfund it buy paying $30,000. He would also get a term policy of $2,000,0000, which he might convert partially down the road, after the first Whole Life policy is well seasoned.

As for your question, I don’t believe I’ve ever reviewed a USAA whole life policy so I can’t comment on then specifically. I would simply encourage you to start by clarifying your personal goals and to then evaluate each option based on how well it will help you meet them. With that said, of your main goal is investing for retirement then I would typically encourage you to max out traditional retirement accounts before considering any kind of life insurance.
Finally, the loan that I mentioned in my above post as interest free and tax free after the 11th year are a little more complicated than a “free loan”. First, the rate may increase in the future (at the discretion of the management) to a max 0.25% so that over time would add up if you took out a loan for retirement and had no intention of paying it back. Also, the loan balance is actually transferred to a loan reserve account where interest is charged at 2%, but at the same time the money in the loan reserve account earns interest of 2% which is credited to the Policy Value. So this is how they achieve an “interest and tax free” loan. I actually did not understand the specifics of this transaction or any IRS consequences that you could potentially have.
I have a joint term life insurance policy with my husband and a universal life insuranc for my self. The term life face value is $100,000 and the uni is $25,000. The latter cash value is $761.00 apparently they were taking the monthly premiumout of it without my knowledge. They asked me if I would like to close it out and take the closed out value of $700.00. I need advice on what to do. I am paying $135.00 a month for the joint policy and I also have a whole life insurance on my 22 years old child in college. I pay $50.00 a month for that. I think the term life is too expensive and I am concerned that with my husband an I whom are in our fifties that we may need to die just before we reach 80 so that our child can have some financial stability times are tough and we are poor people. Poor people take out insurance to cover their death and to leave something for their children. There just aren’t enough money to invest in stocks and bonds or other things and the little retirement money is needed to live off.
This shift to universal life by insurance companies has made premiums cheaper but removed many of the guarantees that came with traditional whole life insurance like guaranteed face amounts, guaranteed premiums and guaranteed cash values. The result is that there are a lot of underfunded universal life insurance policies out there which aren’t really permanent policies anymore since they can’t support themselves and will lapse instead of paying out.

Insurance brokers perform a plethora of duties for individuals and businesses in search of the right insurance for them. When you contact an insurance broker for a quote, he will acquire some information and assess your individual needs. An insurance broker will compare the coverage of various insurers to get you the best conditions and rates. A broker will also search for opportunities to combine different types of insurances to obtain discounts or reduce premiums. As brokers do not work for the insurance companies, their recommendations are unbiased and in favor of the insurance buyer.
Also, you said whole life is not an investment. But by definition, it is an investment. An investment is simply where you put money into something expecting a return in the future. And whole life insurance does provide that. Plus if it is a mutual company as mine is then you become a partial owner which means you get to vote and help the business make good business decisions.

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