Have ever been told that a whole life insurance policy is the best investment you can make for your future? If so, you are in good company. Agents may push permanent policies because they get a handsome commission for each policy they sell. Agents can earn commissions up to 130-150 percent of the first-year premium of a permanent life policy.
With the potential for such substantial earnings, it is easy to see why permanent life policies are pushed by so many agents. In fact, whole life policies made up over 60 percent of individual policies sold in 2014, according to the American Council of Life Insurers.
Unfortunately, many of those who purchase permanent life policies probably do so because they believe one or more commonly perpetuated myths about such policies. If you’re having trouble determining what is true and not true about whole life coverage, here are a few of the most common myths you should watch out for.
Myth #1: Whole Life Is a Smart Investment Idea
It’s simply not.
While some agents may tout permanent life policies as the best investments you can make, this simply is not true. A traditional balanced portfolio, like the DFA Global 60/40 allocation is likely to provide higher returns, in a shorter period of time, and for less expense—While allowing you to purchase a term policy which provides a higher death benefit for when you need it the most e.g. young earners with young children.
Myth #2: Whole Life Is the Ideal Way to Protect Your Pre-Retirement Income
Life is unpredictable, and it is impossible to know if you will live a long and healthy life or die prematurely due to an accident, disease or some other reason. If you were to die early, would a permanent insurance policy provide your family with the ability to care for themselves? It may, and many agents claim that it will, but let’s compare it side-by-side with a term policy.
A $1 million face value, 30-year level term policy on a healthy 30-year-old runs around $680 per year. Compare that to a similarly-valued whole policy that could cost anywhere from $8,000-$10,000 per year.
In order to take care of your pre-retirement income and free up your resources to make mortgage payments, buy groceries, and take care of other day-to-day expenses and wants, you may want to purchase a term policy. Doing so will give you the coverage you need while giving you the freedom to meet living expenses and put some money aside into traditional investment opportunities that will set you up for a great retirement.
Myth #3: Everyone Is a Good Candidate for a Whole Life Policy
Some agents claim that permanent life insurance policies are appropriate for everyone. In reality, they only make sense in a couple of situations: when complex estate planning is involved or the purchaser has special needs. In all other situations, purchasing a term policy is likely the more appropriate decision, as long as the policy holder also puts some money away and invests in his or her retirement.
For most people, permanent life policies simply aren’t affordable, as illustrated by a study released by the Society of Actuaries and referenced in the Wall Street Journal. According to the study, 20 percent of permanent life policies are terminated within three years of issuance while 39 percent are terminated within 10 years of issuance.
Those who dropped their permanent life policies would have been in a better financial situation if they had purchased a more affordable term policy.
Myth #4: The Cash Value of a Whole Life Policy Always Grows Over Time
Some states require agents to show clients worst-case scenarios in regard to the performance of their insurance cash accounts. Most agents downplay these scenarios in favor of very optimistic illustrations that project the potential growth of a permanent life cash account over time.
Unfortunately, there is no certainty that the actual numbers will reflect these generous projections. Depending on a variety of factors, including current interest rates, costs can go up and dividends can go down at any time.
Myth #5: Whole Life Helps You Save on Taxes
A retirement account can lower your investment tax bill much more effectively than a permanent life policy. There are some agents who claim that permanent life policies provide tax benefits that are equal to a Roth IRA* or 401K, but this is misleading. Ditching your retirement account in exchange for a whole life policy is not an equal exchange and will not benefit you in the long run.
Both a Roth IRA and a 401K will provide you with more tax savings over your lifetime than a permanent life policy, and they will also give you the opportunity to contribute to investments that provide a higher return.
Myth #6: A Permanent Life Policy Is the Perfect College Savings Plan
Have you been wondering how to save up for your children’s college? A crafty life insurance agent may try to convince you that a permanent life policy is the best way to do so. While it is true that you can take out a policy loan to pay for tuition, there are better ways to do so.
A 529 plan, for example, is a good college savings option in many states, and frequently offers a state tax break. Additionally, you have the freedom to withdraw money from your 529 plan, whereas money taken from a permanent life policy is only borrowed.
If you are interested in buying a term life insurance policy…we can’t help!
But don’t worry, we work with several independent agencies who specialize in serving clients of fee-only planners like us.
We can help you figure out the appropriate amount of life insurance for your particular situation as part of a comprehensive financial plan. If you would like to learn more about the various investment and retirement options available to you, we would love to speak with you. Please get in touch with us to schedule your complimentary 45-minute introductory meeting.
*you won’t receive an upfront deduction for regular “Roth IRAs” or “Roth 401k Contributions”, rather the tax savings come in retirement when you can make withdrawals tax-free.