Whole Life Insurance Explained - Eggstack (2024)

FAQs

Why is whole life insurance a money trap? ›

Whole Life Insurance is not the financial silver bullet it's often made out to be. While it may offer some investment benefits, these are generally outweighed by the high premiums and lower returns compared to other investment options.

Whole life insurance is a permanent insurance policy that pays the beneficiaries a specific amount upon the death of the insured. Because the insurance policy also builds up a tax-deferred cash value over the life of the policy, the policyholder can borrow against it.

The average cost of a $500,000 whole life insurance policy for a healthy 30-year-old is $451 per month as of May 2024. Your personal rates depend on your age, gender, health, and hobbies, as well as how much coverage you need.

For every $100 you invest in whole life insurance, the first $5 goes to purchasing the insurance itself; the other $95 goes to the cash value buildup from your investment, Ramsey says. But for about the first three years, your money goes to fees alone. Someone is making out, and it's not your beneficiary.

The cash value within a whole life policy grows without income taxation for the individual. An additional benefit of life insurance compared to other assets is the tax treatment of the death benefits.

Cons of Whole Life Insurance

Whole life is more expensive than term life, and you will receive a lower death benefit than you could get with the same amount of money with a term policy.

While there are many whole life insurance benefits, there are some drawbacks—like higher premiums (compared to term life insurance), lack of flexibility, slower growth and potential penalties.

The $10,000 refers to the face value of the policy, otherwise known as the death benefit, and does not represent the cash value of life insurance policy. A $10,000 term life insurance policy has no cash value.

Can You Cash Out a Life Insurance Policy? With a cash value life insurance policy, like whole life or universal life insurance, you can access the cash value. One of the ways to do that is to cash out or surrender the policy. If you choose to cash out your policy, you'll receive the cash value minus any surrender fees.

The average cost for a million-dollar life insurance policy is anywhere from approximately $50 to more than $1,000 a month, depending on your age, health, annual income, policy type and other factors.

Is whole life insurance ever a good idea? ›

Just keep in mind that whole life insurance is quite expensive and often takes over a decade to earn reasonable investment returns. Therefore, it's typically only a good consideration if you're relatively young, have a high income and want to pass on money to your family.

How fast does cash value build in life insurance? Most permanent life insurance policies begin to accrue cash value in 2 to 5 years. However, it can take decades to see significant cash value accumulation. Consult a licensed insurance agent to understand the policy's cash value projections before applying.

Because of this, it's not uncommon to see agents find creative ways to work permanent life insurance into a financial plan. The truth is that most people simply don't need permanent insurance, and are far better served with a term policy. Whole life insurance is costly, and offers very poor return potential.

Suze Orman isn't a fan of whole life insurance, and especially not as an investment. Investment portfolios for whole life policies usually have expensive fees and are overly conservative. Keep your investments and insurance separate, and stick to term life insurance instead of whole life.

Some of the top reasons for a claim to be denied include fraud, high-risk activities, suicide clauses, policy expiration and the possibility of beneficiaries' involvement in the insured's death.

It might not be wise to cash out a life insurance policy when you need money. You may want to consider how the decision will impact your family if you die without a policy or with a lower death payout due to this decision. Choosing an alternative way to access funds might make more sense for you now and in the future.