If (Whole) Life Was Just That Simple!

There are two distinctively different schools of thought on how to provide life insurance for your family. One shcool of thought would have you load your policy with cash value on the premise that the cash value can be a savings or retirement account. Whole Life. The other school of thought would have you insure all of your short and long term needs at a fraction of the cost by leaving that cash value in your hands.

So, what’s right and what’s wrong? It’s a question that people come to grips with on a daily basis as they meet and talk to life insurance agents. I will tell you straight up that this isn’t a matter of two good ideas to choose from. There is a right and a wrong. Whole life, for all the virtues that the agents selling it will extoll, is all about the cash value.

That cash value doesn’t magically appear because you have whole life policy. And that cash value isn’t there just for your benefit. The cash is nothing more than an overpayment on your life insurance, an unnecessary overpayment to accomplish the goal of having permanent insurance. Back when whole life was the only permanent game in town with guaranteed level premiums and death benefits, well, there simply wasn’t a choice if your need was permanent. Today there are options in the form of universal life policies with no lapse guarantees. No cash value to muddy the waters. Just guaranteed level premiums and death benefit. Just life insurance at a fraction of the cost of whole life.

I mentioned that the cash value in a whole life policy really isn’t there to benefit you. Whole life agents will tell you that you can borrow against it.  The will suggest that the cash value can be used for retirement.  They will suggest that it is this cash buffer that allows the policy to stay in force forever. They would be talking out of both sides of their forked tongue to have you seriously consider that scenario. The cash value in a whole life policy is critical to the future performance of the policy, simply because they have structured it that way. So, if you borrow from it or use it for retirement, you are ransacking the future performance of the policy.

So, who gets the value in the cash value? Cash value drives up the cost of the policy. Higher cost means higher commissions for the agent. The cash value allows the company to continue to pay commission as long as the policy stays in force, usually up to 10 years. With term insurance or universal life there is a first year commission and then your entire premium goes into keeping your life insurance alive, healthy and viable. So the agent gets more bang for your cash value than you do.

And the company of course must giggle at what a whole life policy does to their bottom line. The sale up front is likely to be 3-5 times more than other products to cover the same life insurance risk. And they have the added benefit of knowing that when your policy does build cash value, they can loan it back to you (yes, it yours and yes, they are loaning it to you). They will offer in any given year the opportunity for you to skip payments and let the cash value take care of it, a loan. There is no burden on the company to explain the long term ramifications of that action and those ramifications can be as severe as your policy collapsing with no further coverage.

Bottom line. One is right and one is wrong. 20 years ago there were gray areas that might make you believe it is more prudent to own whole life. Today folks, it is as black and white as it can be. Don’t purchase whole life insurance until you have seen both sides of the story fully illustrated.