What are the benefits of investing in a whole life insurance policy?

I'm 27 years old and have had a few insurance salesman try to sell me whole life insurance. They call themselves financial advisors, but no matter what I tell them, they continue to tell me that whole life insurance is what I need. The way I look at it is, I'm not going to need insurance at a certain point in the future. Why would I pay high fees to tie together my insurance and investments when I could just invest in my 401(k) and Roth IRA and buy cheap term insurance? I feel like these salesman have no experience and know less about personal finance than I do. What are some good reasons to buy whole life insurance?

Personal Finance, Investing, Life Insurance
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February 2017
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Hi,

Great question. I'm sorry you have had a bad experience with life insurance salesman.

I'm going to have a contrarian opinion to other professionals on this board. I believe you should be well informed.

The first response is that at 27, I'm sure you are figuring out that we are all in sales. Selling ourselves to our employers to keep our jobs, starting a small business, influencing our spouses to let us watch what we want on TV, or even selling life insurance. So just because someone is in sales, does not mean they cannot be a great resources for you. Sales also include the high and mighty, "I'm not a salesman", fee-only financial service providers. To say otherwise is to not be honest. The fact is, as a capitalistic society, we are all competing for your dollar so please don't let the self-proclaimed non salesman distort reality for you. Otherwise, who would buy their fee-only service if they did not try to sell you the benefits of their services? And just for the record, I have experience doing all types of financial services to include fee-only. It is not a good value proposition for the consumer in my opinion. To make a plan profitable planners have to charge thousands of dollars per case or charge hundreds per hour to give you a binder of spreadsheets that most likely will be meaningless in 2 years because your situation has changed. And guess what? You will have to spend more to update your plan or pay a retainer. Now let me ask you, is that the best use of your capital? I mean, someone has to pay the CFP fees so why not you?

The next response is that I am proud to be a 4th generation life insurance professional. My family lineage has helped thousands upon thousands of people at their time of need during some of the darkest hours of their lives (death of a loved one). So I have a tremendous appreciation and respect for what life insurance can mean for a family and I am not embarrassed or ashamed of what I do professionally.

The next thing is that I agree with some of the posters that whole life is not for every person. It is really for individuals that are financially and professionally established that have an adequate income. At 27 years old, it may be premature for you to buy a whole life policy and it might be better for you to buy a longer-term policy with a feature to convert to whole life in the future. I prefer to recommend it when clients are in their 30s and 40s, generally speaking.

Now, to get back to your specific question, here are some (but not all) reasons why whole life insurance can be a great purchase for you:

1. Non-correlated asset class

Whole life insurance has two components that are not correlated with the market: a fixed interest rate and the timing of your death. Is that fair? Regardless of what the markets are doing at any one point in time, you are contractually guaranteed a fixed rate of return and your family will have permanent access to capital when you die. Which last time I checked we all die, right? So yes, you can theoretically earn more in the market however, you are subjecting yourself to unknown market risks and also risking your own insurability in the future with just a term product solution.  So although it is not a sexy investment product, there are benefits to owning it as an asset class.

2. Risk Management

If you were to become permanently or temporarily disabled, will your employer fund your 401(k)? Roth IRA? IRA? Chances are they will not be funded. In the case of whole life insurance, there are features available that will make the insurance company responsible for paying your premiums while you are on disability. Whole life is also (depending on the state in which you live) protected from creditors and lawsuits if you are found liable for something you did professionally or personally (ie auto accident).

3. Tax treatment

Most posters have already mentioned that the tax treatment of cash value life insurance is favorable in this country including a tax deferral on cash value and an income tax free benefit to your beneficiaries.

4. Contract Backed By Financially Strong Institutions

Life insurance companies are some of the strongest financial institutions in the world. Many have high ratings from Moody's and Standard and Poor and I recommend buying from a highly rated and conservatively managed company.

5. Unknown time of death

You mentioned that you plan on not needing the insurance when you are older. Many posters have also mentioned this. I hate to ask you, but do you know the hour of your death? Any reasonable person will say that they do not. So therefore, if you do not know when you are going to die, then how do you know that your surviving family members will not need the money when you die? Having the protection in place for your family and loved ones to help with expenses and maintaining their standard of living when you die is not a poor financial choice as others on this board would lead you to believe. After all, life insurance is for the living not the dead.

Finally, Whole life insurance comes in many different shapes and sizes, including limited pay policies designed for cash value or policies designed for longer protection and not for cash accumulation. It depends on the strategy you are looking for. To make sure you are selecting the right policies, ask more questions and give it a fair chance and comparison to include non rate of return factors like risk management and liability protection.

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