Most people know they need some form of life insurance, but they may get tripped up by the complexities of the products and language. For example, there are lots of life insurance products out there, and you may be wondering how they compare, and which one is right for you.

Here, we’re going to do a deep dive into whole life insurance and talk about an important question: Is whole life insurance worth it?

How does whole life insurance work?

Whole life insurance is a form of permanent life insurance. Remember that permanent life insurance is one of the two main types of life insurance (with the other being term life insurance).

Whole life insurance includes a death benefit (just like a term life insurance policy does) and a cash surrender value.

With a whole life insurance policy, the premiums you pay during the early years are usually higher than the amount needed to cover the risk of your death. These “excess premiums” form the policy’s cash surrender value.

In other words, your insurance company takes the amount of money that you’ve overpaid by during the early years and places it in a bank account with your name on it. Each year, the insurance company invests this money. This allows your account to accumulate interest, which increases your cash surrender value.

As you get older, your probability of dying (and, therefore, the cost of your insurance) gets higher. (It’s no secret that you aren’t going to live forever.) When you reach a certain age, the premiums you pay for your policy won’t be enough to cover the cost of your insurance. At this point, your insurance company will start pulling money out of your cash surrender value account to cover the difference.

The structure of whole life insurance allows you to pay the same premiums every year throughout the policy, even though the cost of your insurance technically increases over time. If you decide to cancel your policy at any point, you’ll receive the cash surrender value of the policy (the amount of money you previously overpaid by).

So is the cash surrender value a good investment?

Remember, the cash surrender value of a whole life insurance account earns interest. This interest is actually a dividend from the life insurance company’s yearly profits, and the growth rate is generally low compared to other investments because life insurance companies have additional expenses (like policy administration expenses and underwriting costs) that a pure asset manager does not.

Another challenge when thinking about this as an investment is that there are major penalties to withdrawing your cash surrender value. Usually, the only way to collect the full cash surrender value before death is to lapse (aka cancel) your life insurance policy. Life insurance companies usually charge a fee to do this.

Most of the growth in your cash surrender value doesn’t come until you’ve held the policy for 20–30 years! So if you surrender within the first 10 years, it’s unlikely that your cash surrender value will have grown significantly.

So what do people like about whole life insurance?

Here are a few things people like about whole life insurance:

  • You get a death benefit no matter what – as long as you keep paying for the policy, your beneficiary will receive your death benefit (even if you die at age 90, for example)
  • There is a cash value to your policy – meaning that some of your premiums go into a tax-deferred savings account that accumulates interest

What are the issues with whole life insurance?

We’ve talked about some of these before, but let’s review them here so we’re all on the same page.

Whole life insurance is so much more expensive (like 4x to 5x more expensive) than term insurance.

Since the price is so much higher, we too often see customers who are holding small permanent policies ($100K - $150K) meaning Canadians are sacrificing their coverage amount to get a longer duration policy. The issue with that? That is seldom enough to cover your debts (your mortgage, line of credit, etc.) – which means too many people are leaving their families unprotected at the time that it really matters (when their mortgages are at their highest & they have young kids). That doesn’t ring well with us.

You have very little flexibility with your savings.

You are technically allowed to borrow money from the “savings account” in your policy, but it usually takes a long time to build up enough savings within the policy to take out a meaningful amount of money. So if at some point the $200/month becomes too expensive, you might be forced to cancel the policy, and you lose your coverage. In fact, we saw a US stat from the SOA recently that claimed 25% of whole life policies are canceled within the first three years. Yes, you can then apply for a new term policy, but at that point, it will be more expensive since you’ll be older. And it might not even be available to you if your health has deteriorated.

So is whole life insurance worth it?

For some people with very high incomes who are looking to take advantage of some of the tax-deferred components of life insurance, whole life insurance can make sense. But for the vast majority of people—and especially the large population of people who end up surrendering their whole life insurance policies—a term life insurance policy is the better option.

Let’s talk alternatives: term life insurance

So what type of life insurance do we recommend for 95% of people? Term life insurance. You’ll get more coverage for 4x to 5x cheaper.

With PolicyMe, you can get the most affordable insurance option on the market today.

Laura McKay

COO & Co-Founder

Laura brings 7 years of experience working in insurance & strategic operations as a management consultant at Oliver Wyman, after experiences at Manulife and Munich Re. In 2017, she launched a successful initiative for the World Economic Forum focused on innovation in insurance, working closely with insurers, tech pioneers, and policy-makers.

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