Whole Life Insurance – 5 Reasons I’ll Never Buy It
If you’ve been following YD&NB from the beginning then you will know that my most controversial articles have been about life insurance and whether it is a scam or not. That post received quite a bit of backlash but it also got people asking questions.
Why will I never buy whole life insurance?
In short, whole life insurance doesn’t actually provide the great benefits that are used as selling points when you buy a policy. It’s overpriced, offers few benefits, and gives you a small return on your investment. Does it offer peace of mind? Potentially. Will it also cost you thousands of dollars to have one? Yes, absolutely. The numbers don’t lie.
I was exposed to life insurance for the first time while I was in college. I had a friend that got into the business and tried to sell a bunch of buddies on it. He was successful with a few of them and today, most of those people regret buying it. In fact, some of them have dropped their policies all together because the benefits of owning it didn’t outweigh the cost. Back then, I didn’t buy because the whole thing just seemed off. The old saying “If it sounds too good to be true, it usually is” definitely came into play here.
Another experience I had with life insurance in college was when a large company tried to hire me to be that salesman. I went to the interview and was offered the job. Before I accepted anything, I went back into his fancy office in the downtown highrise and asked some questions specifically about the products. During the interview, he wasn’t explaining the insurance, all he could talk about was how much my commission checks were going to be.
That was it.
Now, I love making money, I’m not going to lie. But if you are selling a product that is supposed to better people’s lives, then I want to hear about that. If the product is actually good, using that to reel me in makes sense. I was only hearing about how I’m going to make 60% of the policy’s first-year premium (which is a ridiculous number and a red flag).
More on that later though.
In this article, I want to address whole life insurance specifically and why I think you should absolutely never buy it. Yes, I realize this is going to ruffle some more feathers but give the article a read and a chance for me to explain myself.
1) Low Investment Returns
One of the main selling points of whole life insurance is that it offers a great return on investment. This is a complete lie. It has been proven over and over that the returns you make on a whole life policy aren’t great. Even worse, they aren’t guaranteed even though these salesmen act like they are.
You will be shown a fancy graph with a huge number, usually over $1,000,000 on the far right and that gets your attention. Who doesn’t want to have $1M? What they forget to tell you is that your money could be invested somewhere else and turn into even more than that.
Agents flaunt a 4% risk-free investment that will leave your beneficiaries a great nest egg so they can go on with life. What they also forget to tell you is that your ‘guaranteed’ return on investment is pre-fees. Yep, that’s right. Nine times out of ten, they take their fees out of the interest you have gained on your investment. This takes that 4% and quickly puts it around 1% or less.
Fees are my worst enemy and they should be yours as well. Companies hide them and they will literally cost you thousands of dollars.
At the end of the day, you need to run the numbers yourself. Chances are high you could take that same money and put it into a high yield online savings account like Wealthfront and make a guaranteed return (around 2% APY) that is better than the life insurance option.
2) Whole Life Is Overpriced
Whole life insurance is overpriced, very, very overpriced. I always knew that whole life was more than term but I didn’t realize that it’s on average 8-10x more. I ran my information through a calculator that State Farm offers and my quote was 18x more!
Here are my numbers below:
As you can see, annually I could pay almost $10,000 for a $1M whole life insurance policy. On the left side of the graphic, you can see the cost of term at $520 annually. I’m actually a fan of term life insurance in certain circumstances, but that’s a topic for another article.
Most people can’t afford an emergency expense of $500 so how do you think they will be able to afford a policy that costs almost $10,000 annually?
3) Most People Regret Buying It
I told you in the beginning that most of my friends that bought whole life policies ended up dropping them. They aren’t the minority, in fact, they are with the other 80% of people that surrender their policies early. If 80% of people drop a product before they get the maximum benefit, do you think there is a problem? Yes, absolutely.
These large corporations know this and that is why some won’t allow you to do so within the first 3 years. If you choose to, then you surrender everything that you have paid on your premium. That’s right, your money is gone.
If you are patient and wait a couple of years, say 10, you still will pay some large penalties for pulling your money out early. Every company will differ, but they can be up to 50% of what you’ve paid and if you are lucky they go as low a 10%.
If you connect the dots, it sounds an awful lot like a trap. They get you in with a great sales pitch and then once you’ve started paying, you are stuck for many years.
4) It’s Built To Be Sold
At the beginning of this article, I told you how I was blown away by the commissions I could earn as a life insurance salesman. Seriously, I could have been earning probably double what I do now but every day my moral compass would be tested. This is a reality, and it feels like it should be illegal.
What I want to do is put some context to this. If you remember the image I posted above of the quote I received from State Farm, you’ll see that annually I pay $9,530 for a whole life policy. Now, I’m not sure what State Farm’s commissions are exactly but let’s use the 60% I mentioned. I’m pretty sure this is on the low side of the average but let’s roll with it anyway.
If an agent received 60% of my first year’s premium they would make just over $5,700. How insane is that? If you get 10 people to sign up for a policy a year then you’ll be making well above the average yearly earnings here in the U.S.
And that’s just 10 people!
The combination of fancy marketing material, great sales pitches, and huge commissions make for a toxic industry. It incentivizes people to sell policies that are over-insuring and to people who have absolutely no need for them.
If you want to learn more about how life insurance commissions are paid out be sure to check out Life Ant’s article that breaks it all down: Life Insurance Commissions- How Life Insurance Agents Are Paid.
5) Downsides Outweigh The Benefits
My last reason somewhat takes everything that I mentioned above into account and compares it to the benefits. You see, whole life insurance does offer some benefits. They are small but benefits none the less.
- Tax-free growth
- Asset protection
- Ability to borrow against the cash value
- Life long death benefit
As you can see, it’s a shortlist and not all that impressive. If you use other investment options like a simple 401k you can get most of these benefits. Not only will you receive them but you will get them without the hidden fees and a much larger return on investment. The only item on the list that other investment accounts don’t offer is the life long death benefit (obviously).
Could the benefits be worth it for some people? Yes, but you need to be a very specific person and of all the people who have a whole life insurance policy that is probably less than 1% of 1%.
The Bottom Line
At the end of the day, some people may not agree with this break down of whole life insurance and that is okay. Whole life policies do offer some small benefits as well as peace of mind but the numbers don’t lie. If you put that same premium payment into your 401k or other investment accounts, your nest egg will be exponentially larger than any policy will payout.
Are there some outliers where whole life insurance makes sense? Yes absolutely. If you believe this is you then you should consult an independent financial advisor that has no ties to the insurance company. Because again, conflicts of interest do exist. For the other 99.99% of you whole life doesn’t make sense and never will.
To me, that’s the biggest reason. I want to build my wealth intelligently and doing so by investing in an illiquid investment with subpar returns and hidden fees just doesn’t work for me. Does it work for you?
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