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When Whole Life Insurance Actually Makes Sense

by Kevin Mercadante

In almost every corner of the financial universe, we’re told that term life insurance is a better deal than whole life insurance. In general, I agree – I think we all do. But there are times when whole life insurance actually make sense.

Based on logic alone, that has to be true. Since each of us have different needs and goals, there really is no such thing as one size fits all. Term might come close, but it’s not the best choice for everybody.

What are some situations when whole life insurance might make sense?

When you need truly permanent life insurance

when it is good to buy whole life insurance

There are times when it makes sense to buy whole life insurance.

One of the fundamental limitations with term life insurance, is that once the term is up you must renegotiate your insurance coverage. That will leave you with one of five options:

  1. Renew the current term policy into a new term policy of equal length – with a higher annual premium.
  2. Renew the current term policy as a one-year renewable term policy – that will keep the premium down at the beginning, but they will increase each year.
  3. Renew the current term policy, but reduce the amount of coverage in order to keep the premium level.
  4. Apply for a new policy and risk rejection or a higher premium due to age and/or health conditions.
  5. Let the policy lapse, and go without life insurance.

For many people that is equal to playing with fire. Some people actually do need truly permanent life insurance. It could be that there is a family history of terminal diseases. In that case, the time to get life insurance is while you are young and healthy. Having to renew your coverage every few years could result in complications.

Whole life insurance is true permanent life insurance. You take the policy, and once you do, you have it for life. Both the benefit and the premium are fixed for life, and that provides a level of certainty that a term policy cannot.

When you need a forced savings plan

Financial planners always say “buy term and invest the difference.” That’s a winning strategy if you are the kind of person who can save money. But what if you can’t?

Whole life insurance may be a poor investment vehicle, but just about any investment plan is better than none at all. Since a portion of the premium of a whole life policy goes into an investment fund, it represents a form of forced savings.

Term policies have no investment provision at all, which is why they’re sometimes referred to as pure life insurance.

When you’re over 50 – or getting close to it

One of the other fundamental problems with term life insurance policies is that premiums rise as you get older. Sure, you can take a 20 or 30 year term policy, but eventually even that will end, and you’ll be facing higher premiums.

If you feel that you will need life insurance coverage for the rest of your life, a whole life insurance policy can do that. The trick is to apply for it before the premiums become prohibitive. You’ll probably want to do that before you turn 50, or develop any health conditions. This is because premiums rise much faster as you get older, or you develop health issues.

Buying life insurance for children

Whole life insurance could be the better choice if you are buying a policy for your children. Since they are so young, the premiums will be extremely low. Add to that the fact that there is an investment provision, and your child will not only have low-cost life insurance, but also a budding investment portfolio.

The combination of permanent low cost life insurance – and the investment provision – can serve them well as they enter adulthood.

You could also take out a term life insurance policy on them, and it will be even cheaper than a whole life plan will be. But once the term expires, they will face the same choices that everyone else does in the same situation. If you’re going to purchase life insurance for your children – and it looks like it’s going to be term – consider adding a convertibility clause to the policy. It will add to the cost of the plan, but it will allow them to convert from a term policy to a whole life policy before the term expires, without requiring a medical examination.

If you are shopping for life insurance, be careful that you don’t exclude whole life insurance from the decision. Depending on your own circumstances, it could be the right policy for you.


Published or updated December 2, 2013.
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{ 6 comments… read them below or add one }

1 Debt BLAG

” just about any investment plan is better than none at all”

I’m always squeamish about saying this… but it ends up being true more often than I’d like to admit.

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2 Kevin H @ Growing Family Benefits

I agree with the forced savings component. The invest the rest crowd rarely does. It sounds good, but in practice people consistently overspend and under save. Automatic withdrawals seem to be the only reliable way to get people to invest, and whole life helps meet that purpose.

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3 AWB

Benefits of life insurance include no contribution limits unlike 401(K)s and IRAs. Some policies are also creditor protected and can avoid the estate tax while gaining cash value via fund management. Life insurance is definitely a financial instrument to consider in financial planning.

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4 Kevin Mercadante

I’m with you in being squeamish about that statement, but a lot of people use the lack of perfection of investments as an excuse to not invest. In that case, a flawed investment is generally better than no investment at all. It may be the move that gets you moving toward better chocies going forward.

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5 Kevin Mercadante

AWB – Agreed, life insurance has its applications and there are some ways where it works better than the alternatives.

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6 Kevin Mercadante

Hi Kevin – I tend to agree. Most people use the savings – what ever the source – to fund a better lifestyle, rather than for investment. Preventing that from happening seems to be the primary advantage of whole life.

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