This post is a follow-up to last week’s post about term insurance. In that post, I mentioned that term is almost always a better option than Whole Life insurance. Today, you’re going to find out why, because I’m going to share 6 reasons (among many others) that Whole Life insurance is almost always garbage.

Reason #1: Whole Life is much more expensive than Term insurance.

In some cases, premiums for a whole life insurance policy can be as much as ten times higher than those for the same amount of coverage on a term policy.

For example, a quick look online says that, for me as a non-smoker, a 20-year term policy with a $500,000 death benefit would cost me $43 a month. That same amount of coverage on one of the cheaper Whole Life policies available out there would cost me $326 a month; over seven-and-a-half times that of my Term insurance quote.

Who the hell wants to pay that much money for insurance every month?

Reason #2: You shouldn’t need insurance for your whole life.

I know I know, I can hear the insurance salespeople and internet trolls losing their minds over the above example. “But Term Life only covers you for a set period, and Whole Life covers you til you die!”

Let me ask you something. What is life insurance for?

I’d argue that its sole purpose is to make sure your dependents don’t end up on the street if you kick the bucket unexpectedly.

So then let me ask a follow-up question: if you’ve been saving and investing wisely your whole life, and you have, say, $3,000,000 in the bank… will your family be out on the streets if you die? No? Cool, glad we agree. So then why are you still paying for insurance?

If you’re saving and investing like you should be, there will come a point in your life where you are self-insured; in other words, you have so much saved up that your family will be ok if you die, even without the insurance benefit. If you plan it right, your term insurance should either expire for be cancelled right as you hit that point, so that you pay as little for your insurance coverage as possible.

Let’s take it a step further.

What if I invested that $283 every month over the 20 years of the term policy? Well, at 8%, I’d have over $165,000 invested, in addition to anything else I’ve saved during that period. If I keep putting that money away for another 15 years, I’d have over $636,000 – that’s more than the total value of my life insurance.

Remind me why I would want to pay for insurance longer than I need, when I can invest the savings and end up with more of my own money than the death benefit was worth?

Yeah, I can’t think of a good reason either.

Reason #3: You’re paying for two benefits, but only ever get one of them.

“But wait,” says the insurance salesperson. “Whole Life insurance isn’t just insurance; there are actually investments built into the policy too, so you’re covering yourself and building wealth!”

True! Except you forgot to mention that little line buried deep in the terms and conditions that specifies that it’s an either/or arrangement. If you die, the company pays out the death benefit, but keeps the cash value of your investments for itself. It’s not criminal, but it should be.

And if you want to access that cash value – which you’re paying for with your own money – for yourself? Well, you can either “borrow” it – which I’ll get to in #5 – or you can cancel your policy, and you’ll get that cash value. Once all of the fees and penalties are paid, of course.

The death benefit, or the cash value. You’re paying for both, but you only ever get one or the other. Think about that.

Reason #4: The investment returns in Whole Life plans are trash.

To add insult to injury, the investment returns in a Whole Life plan tend to be garbage. After fees, you can expect to earn a whopping 2-3% per year on your money. Tell me, with inflation being over 5% right now, does that mean your buying power is growing or shrinking each and every year?

That’s right… it’s shrinking. Insurance policies are not investments. I’ll say it again for the people at the back: insurance policies are not investments. Their purpose is to insure your life.

Reason #5: You have to pay for the privilege of using your own money.

Back to that notion of “borrowing” your own money within the policy. You can do that without cancelling your insurance policy… but the insurance company will charge you interest. That’s right, you’re being charged to access your own money.

Again, it’s not criminal… but it should be.

Now, those of you who enjoy finding loopholes may be thinking “ok cool, so I can borrow all my money, keep it out, and then if I die, my family will have both my investments and my death benefit!”

Wrong again, my friend.

If you die while you have an outstanding “loan” against your policy, the insurance company will absolutely pay out the death benefit… they’ll just subtract the value of your loan from it first. So you’re still paying for two benefits and only getting one. Yay!

Reason #6: Insurance salespeople get paid WAY more to sell you Whole Life.

Depending on the company, an insurance rep might get paid anywhere from 30-90% of the first year’s worth of premiums on a Term life policy. In my case, they’d make somewhere between $155 and $464 for making the sale.

Whole life policies, on the other hand, often pay 90-100% of the first year’s premiums, which as you know are way higher than those for Term life insurance. So an insurance salesperson could expect to make just under $4,000 for selling me that Whole Life policy instead. Literally 10x more commission for making one sale.

Bear in mind, too, that insurance salespeople aren’t bound by any sort of fiduciary duty, which means they are under no obligation to put your financial needs ahead of their own.

And you wonder why Whole Life still makes up half of all insurance sales in Canada (and similar stats in the US), even when the vast majority of us don’t need it?

Wrapping it Up

I could honestly keep going with the reasons why Whole Life policies suck. But I’m not going to. Six solid reasons should be enough to make you run screaming from anyone who tries to sell you a Whole Life policy, and if not… well, then I probably couldn’t change your mind even with a million reasons.

We’ll leave it at this: for the vast majority of people, you’re better off buying a cheap Term life insurance policy, investing whatever money you would have spent on your Whole Life insurance, and then saving until you’re self-insured. Then cancel your term policy (it did its job – it protected you until you could protect yourself), and be on your way.

Just please don’t throw your money away on a crap product. It hurts my heart to see people get taken advantage of like that.