To buy or not to buy? That is the question. I have not come to sell you whole life insurance but to give you an objective look at some of the most common myths and let you decide whether the myths stand against what appear to be rational arguments.
Before we begin looking at the myths it needs to be pointed out that for some people, whole life insurance is a viable alternative for people looking for something more than a term life insurance policy. Like anything we buy, there are plusses and minuses that need to be weighed out before making a final decision to buy. What we are doing here is to make sure you are being sold some financial piece of desert in the wilderness that you hope to build your future on.
1. Buying whole life insurance gives you a way to weather potential financial disasters such as The Great Recession because it protects your money from potential creditors.
Actually, it depends on the state you live in. There are some states like Hawaii that prevent creditors from grabbing any portion of the value of your whole life policy, but many states offer zero protection. Remember that the majority of laws regarding how creditors can get their hands on your assets are decided at the state level, in state courts. In many cases, states limit the protection to less than $5,000.
2. Whole life policies guarantee that you will be paid a financial benefit after a specific number of years.
The truth is, those numbers are projections and cannot be guaranteed because the future of the economy cannot be accurately projected. If you notice, insurance company stock prices take a hit every time there is a major weather event such as a hurricane, or a less than natural event like an uncontrolled wildfire. So the ability of the whole life insurance company to pay you anything is directly connected to events they have no control over. The numbers are projections, and determined by people who are very good at statistics, but nothing is guaranteed.
3. Speaking of numbers, using whole life insurance as an investment vehicle because insurance companies have all those numbers people working for them is a better answer to the secure investment question.
Despite all those actuary types working for insurance companies, they have no more control over the prices of stocks or bonds than anyone else. You have a number of alternatives available to invest your cash, and while whole life insurance is an option, you need to consider the fees and other expenses associated with choosing whole life.
4. Whole life insurance is the best way to maximize your tax benefits while protecting your money at the same time.
Actually, your 401(k) plan or a Roth IRA are better choices. Both provide greater tax savings and have the added advantage of not having to borrow your own money, which you will do when taking out a loan with a whole life insurance policy.
5. Whole life insurance is a must for optimum estate planning.
This may be true if you have children because it limits any potential squabbling over other types of assets like real estate. But if you have no children you have better choices. Another argument is that you can avoid the Tax Man by reducing the size of your estate by buying into a whole life policy. But most people will not have any estate tax issues to deal with, so the majority of people will get zero benefit from using a whole life policy for that purpose.
6. Whole life insurance is a luxury that you cannot afford to be without.
Though this sounds a lot like double talk, and it is, the idea is that whole life insurance is one of those “nice” things in life that will make you feel secure and as a status symbol. Think about the things you consider to be a luxury and how they can make you feel financially secure while acting as a status symbol. How about a new Jaguar? Or buying an island in the Caribbean for going to when on vacation? There simple are better choices.
7. Rich people are buying whole life insurance, which is another reason you should too.
This is similar thinking to #6, where what seems like a good idea actually isn’t. The most obvious problem with this argument is that most of us are not rich people. Rich people fly from place to place on private jets they own while we are cramped in the back of a Jet Blue plane with 100 other cramped passengers. The needs of the rich are much different than the needs of the average working person, so admit you are not one of the few and move on.
8. Buy whole life insurance when you are young in order to pay a lower monthly premium.
This is a true statement but is one that you need to sit down and seriously think about. The problem with it is while you will be paying less of a monthly premium you will also be paying that money for a longer period of time. As an example, if you are 25 years old now, you will be paying into the policy for the next 30 years. Ask yourself if you have calculated in the cost of inflation and the potential to take that same money and put it into another investment, such as a stock or long term bond, that will give you the flexibility to sell it if necessary. You will find that the only way you actually see a benefit from whole life insurance is if everything stays the same. It doesn’t.
9. There is a locked in security feature with whole life insurance that protects me from losing money.
What many people miss with this statement is the fact that not all life insurance companies survive times of economic uncertainty. So what happens if the company you is holding all your money goes bankrupt or folds for any number of reasons? Your security has just been dissolved into nothingness. Another problem is that the actual rate of return on a whole life insurance policy has lagged behind the historical inflation rate. That means you are losing money every year you hold on to the policy.
10. Using your whole life policy as a backup funding source for things you want now is a definite advantage of getting a policy.
What can be easily missed here is that the purpose of a life insurance policy is for its benefits to be available in time of an unexpected event, such as your death. The advantages of alternative investment forms have been mentioned above, and the best way that makes financial sense to get something you want is to save for it. You will pay no interest and you will not dilute the value of any insurance policy you have, whether it is term, universal – whatever.