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Reasons to Buy Whole Life Insurance

by Contributor

One of the most common questions about life insurance is whether you should you buy term life insurance or whole life insurance? This article gives some reasons why whole life insurance may fit your needs better than term life insurance. As always, consult with a financial planner.

Reasons to buy whole life insuranceI want to be honest and upfront, I did not come up with this post on my own, it was inspired from Neal Frankle’s guest post on this blog titled, “How Much Life Insurance Do You Need?”  Neal wrote a great article about term insurance and how whole life is usually inapplicable stating,

  1. Only buy term life insurance for income replacement and family protection.
  2. Think of life insurance in terms of income replacement. How much income will you need and for how long?

Once you determine that, it’s easy to figure out how much you need to buy.

I think it is the word, only, that usually gets me going, but in a good way.  It has inspired me to write 6 Reasons when to Use Whole Life Insurance.  Why 6? Seems substantially more than 5, but less than those long 10 lists!

Reasons to Buy Whole Life Insurance

1.  You have a Special Needs Child  - The whole argument that your child’s need for a lump sum ends at 18 or 22 is completely and utterly thrown out the window.  In fact, it should 1000% be placed in a Third Party Special Needs Trust.

2.  You have a liquidity Issue with your Estate – Most people who owe a federal estate tax (the top 2%) or a state estate tax (a heck of a lot more people than 2%) usually don’t have the actual cash to pay for it regardless of how rich they are.  Want a cool example? Well it is a cool example for everyone except Joe Robbie’s Family.  In 1990 when he died his family was forced to sell the Dolphins because they owed $47,000,000 in estate taxes.  Yes that is 47 MILLION that the federal government got a hold of.

3.  You have a charitable intent – If it makes you happy to get your name on a building for the university or hospital of your choice, you can. And possible for very little out of pocket.  Yup, you know what I am talking about…getting a permanent life insurance policy because your charitable intent will not be gone in 20 years.  Additionally, depending on who owns the policy, payment of premiums may be an income tax deduction or upon eventual death an estate tax deduction.

4.  You have family health issues – Most whole life policies have riders that allow you to increase your coverage without additional testing.  This could be a huge reason for most people.

5.  You want additional diversification – I’ll be the first to admit this isn’t a great reason, but this is one of the reasons I received for the purchase of another whole life policy from the client.  He watched literally every investment decline in value while his cash portion of his whole life went way up (he is late into his policy).   I would never use whole life insurance as an investment, nor should you buy it as such, but this particular man did.

6.  You own a business and want to take care of succession during life – Picture this…you are running a business with a partner.  The partner dies and you now share business ownership with his surviving spouse or bratty children. By using a buy-sell funded with a whole life policy, you could have bought their shares. You get a step up for half of your shares (boring capital gains stuff) and the partner’s family has the liquid dollars they need.  Why not buy cheap term life insurance? Because hopefully your business lasts a long long time and now instead of being 50 and uninsurable, your whole life insurance policy lasts until a later age.

How much whole life insurance should you buy?

This is one of those areas where you need to examine your current and future financial needs before making a purchase. You will also want to examine policy and free insurance rate quotes before making a purchase.

You can find more free life insurance rate quotes here: US Insurance.

Disclaimer & little about the Author: I do not have any whole life insurance, but hope to purchase some by the end of the year.  The reason I do not have any is because I am currently ridding myself of all consumer debt.  As I have indicated on My Journey to Millions I am licensed to sell life insurance in the State of New York, and will be licensed to practice law in the State of New York in two weeks. Check with your financial or legal advisor before making any decisions.

This is a guest post from “My Journey” from My Journey to Millions. My Journey to Millions offers his readers basic financial planning advice all the way up to advanced estate tax planning , while tracking his journey from debt to Millions. If you like the post please subscribe to his feed.


Published or updated July 6, 2012.
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{ 18 comments… read them below or add one }

1 DDFD at DivorcedDadFrugalDad

Whole Life insurance also provides a pool of emergency cash that can be borrowed against if you have built up enough cash value.

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2 Ryan

DDFD: I would be careful there, as there are usually fees involved with cash withdrawals.

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3 My Journey

DDFD,

I couldn’t agree more with you, but when writing this post, I wanted to give ALMOST bullet proof reasons as to force people to think outside the box when they hear that all whole life is evil.

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4 DDFD at DivorcedDadFrugalDad

@ Ryan depends on who you have it with . . .

There will be interest on the loan, but it is usually more favorable than borrowing from a 401(k). 401(k)’s usually have limits on loans and they must be repaid or they are considered distributions. Life insurance loans don’t need to be “repaid,” the outstanding loan is simply deducted from the death benefit payment.

Finally, it should be understood that significant cash value takes a few years to build.

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5 David

You can custom tailor whole life policies to build cash value quicker than you think and not have it become a MEC. You can use this cash value as your own bank….instead of paying someone else the interest (read finance company) you pay yourself the interest. Thousands of people do this already and they are better off financially. Proper use of Whole Life, that is set up correctly, can literally save people mounds of money over their lifetime. And it can be used as self completing plan…..ie if you become disabled no 401k is going to pay for the funging…..transfer wealth to heirs, charities…as mentioned above. In fact if people knew the secrets of whole life you could buy it in a vending machine and there would be know need for agents.

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6 My Journey

DDFD,

Depending on the company you are working with, return of premiums can be guaranteed after 10 or 12 years. So even if you want to walk you can.

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7 Michael @ The Life Insurance Insider

I too get upset when I hear people saying whole life insurance has no purpose or even Dave Ramsey’s claims that it is a rip off. First of all a product that is designed for a purpose does not inherently rip people off. The agent who sells it for the wrong reason or the company that has hidden fees rips people off, but whole life insurance is term life insurance with a really long term. If you have long term risk to insure and someone sells you a 20 year term policy with rates that skyrocket after the 20th year then that is a ripoff. Yeah, I said. Term insurance can be a rip off too.

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8 Brandin

I am going to go out on a limb here and say I have been writing whole life policies to folks for years with guaranteed groth and dividend payouts. It offers great asset protection, in some states its 100% protected from all outside sources, including child support enforcement apparently. If structured correctly, and i always do, it pays out in retirement income tax “free.” The savings on income taxes almost always blows most other high risk, fee filled, government controlled slop that traditional needs and goals based planning crams down peoples throats.

Now I am not saying you should completely divest yourself from the markets, but throwing all of your money into qualified plans at work and dabling as a day trader is a HUGE mistake that will cost you dearly. TERM insurance is an expense, and one that by mortality charts you will be about 97% unlikely to ever use. Self insuring is costly not only to the person doing it, but to those that get left behind when the person dies.

I believe in turning yourself into your own bank, keeping debt free for life, maintaining a large portion of retirement in a safe minimal risk place then investing in other plans like IRA’s or a 401k, and protecting what means the most to my family, ME. There is nothing in the world capable of doing ALL of that and providing a great return for the LONG TERM then whole life. I cant speak to well of Universal Life, as I have not been a big fan of those since the 80’s.

To you nay sayers, David Ramsey followers, Suzy Oreman drones out there, go speak to a true financial reresentative who stands to gain nothing without your utter and complete success, and they will educate you on how to create a balanced financial portfolio where protection comes first, then success will always follow.

Peace be with you all

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9 Evolution Of Wealth

In terms of loans with regards to cash value I think it is important to bring up non-direct recognition. This means that when you take a loan the amount of the loan is not directly deducted from your cash value. This allows the full amount of cash value (loan amount included) to continue to participate in dividends. This would eliminate the biggest expense of a 401k loan, opportunity cost.

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10 AlanC

Interesting take. I am a very healthy 26-years-old right now. But my father’s side of the family has VERY bad cholesterol and heart issues (in fact, only one male has made it past 70 and thankfully he’s still going strong at 75). My father himself, a former college athlete and never in bad shape, needed triple bypass 6 years ago at 50. So far, my cholesterol readings are great and I do have a healthy mix of my mom’s side of the family in me (which has no cholesterol issues), so I’m hoping that remains the case.

But let’s assume it doesn’t and I someday find myself faced with serious heart problems. Would buying whole life insurance be a good idea? I’d hate to see a 20 or 30-year term expire and have me drop over dead the next day or next year (we all know heart problems can sneak up on victims). Return of premium life insurance sounds gimmicky and unpalatable to me; I want those dollars working for me somewhere else. But maybe I’m missing something.

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11 Evan

Wow, Alan talk about timing! I actually wrote about that EXACT question last night:

http://www.myjourneytomillions.com/articles/why-should-buy-life-insurance-regardless-of-whether-have-spouse-or-children/

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12 woodNfish

Whole life insurance is a rip off and nothing more. The only type of life insurance you should ever buy is term life insurance. Universal life ins. is also a ripoff. Do not fall for the idea that WLF or ULF forces you to save and builds value. If you want to build your wealth, invest in stocks, bonds, precious metals and real estate. Only suckers buy WLF and ULF.

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13 Audi

I disagree, people keep talking about WL as an investment and honestly it often can be but the main goal is to ensure a final expense lump sum. In my opinion you should have whole life insurance because you never have to worry about jumping rates, having to qualify for a new term if you live longer than your term. I have a friend who was (in my opinion) crazy and got a 30 year term for a life insurance policy. This ran out when he reached 67 yes he was guaranteed insurable but instead of the $100 a month it had originally cost him to keep it he would be paying almost $600! My 19 year old daughter bought a 50,000 WL because she was so young it costs her about $20 a month. Even if she keeps it for 100 years she will still have a $26000 profit for her family.

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14 woodNfish

No, you completely wrong. WL does not build value. What happens is that your premiums begin to build up in the policy like a really bad savings account, but there is NO profit. As you pay in, the “savings” are used to supplement the face value of the policy. Whole Life will never pay out more than the face value. In essence you are paying into a program that self -insures you at the end – the insurance company has no liability because they just give you back your own money minus all the money you paid in, and trust me, you will have paid in thousands more than it will ever pay out.

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15 woodNfish

I should elaborate a little more on the fact that WL will never pay out more than the face value of the policy. If you have a $50k policy and you borrow $30k on the “cash value”, you have to pay beack that $30k with interest. Why is that? The $30k is your own money. If you took $30k out of your savings account would you have to pay interest on it? Of course not, so why do the insurance sales weenies tell you it is your savings?

If you dies before you could pay back the $30k, the policy would only pay out the face value of the policy MINUS what they already paid out to you in cash value. You were self insured for that $30k csh value. The ins. companies liability is only the difference between your cash value and the face value of the policy. You will NEVER have a profit from whole life insurance.

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16 Brandin

I’m not sure what companies you have worked with in the past WoodNfish, but I work with over 11 mutually owned life insurance companies and none of thier policies work the way you describe. I feel you had better educate yourself more on the subject before you spout your ignorance on people, everything you said I can disprove in minutes, on paper.

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17 Ed

Term life Insurance offers the same benefits that whole life offers except the premiums are cut in half for the most part. The cash value component is a rip-off that should be outlawed. Let me point out what happens to the cash value when it is use.
1. When you borrow money against the cash value it lowers the death benefit by the amount that is borrowed.
2. While it accrues the CV grows at a nominal rate of return anywhere between 1-3%.
3. You pay it back at about 4-8%
4. When the insured person passes the beneficary is only entitled to the death benefit. The cash value goes back into the insurance company’s pockets! Why would anyone in their right mind put money away for someone else who is not their loved one?
If you are married with children,own a home,have a job with an income higher than $25k a year you are best to buy term insurance for the amount of time that you need it and put money aside in a separate savings program such as a mutual fund that will earn you on the average 9% and upwards. This way you control how your money is managed and if you were to die suddenly your loved loved will benefit by collecting the life insurance AND the savings in your separate account.

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18 Ed

Brandin sounds like a scared whole life agent. WoodNfish is correct in his post.

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