Reasons Not to Buy Whole Life Insurance

Learning to Spot the Flaws in Insurance

Mar 20, 2009 Robert Oakes

Whole Life insurance is a very lucrative industry. Unfortunately it has got rich by offering a product that does not always benefit the buyer.

Life insurance is one of those necessities that most adults feel is the responsible thing to buy. After all, no one wants to leave a family in financial harm’s way if a tragedy occurs. Unfortunately, most people do not understand the product, and end up on the buying end of a high pressure sales pitch.

One of the most lucrative products a life insurance salesman can sell is whole life insurance. This is a bundled product that combines a life insurance element with a supposed savings plan. This is a very expensive way to buy insurance and has some inherent flaws.

Expensive Whole Life Insurance

The biggest flaw to whole insurance is the cost. Simply put, whole life insurance is more expensive than a good quality term insurance. Unfortunately the company selling whole life insurance does not want the consumer to see that, so they market very unattractive term insurance rates. The advice of most advocates is find an insurance company that only sells term insurance. As with any shopping, do comparisons.

No Savings

Whole Life insurance companies counter this argument by saying the savings portion of the policy offset the price. Unfortunately this is not true. First off the rate of return on a policy is very low; many policies have a negative rate of return for many years.

For the policy holders to access their savings, they either have to borrow their own money from the policy, or cash out the policy and lose the life insurance. If the policy holder dies, the insurance company keeps the savings. With whole life insurance, even though the policy holder pays for savings and insurance, the reality is that only one or the other is actually paid; not both.

Avoid Participating Policies

Another sales technique with life insurance companies is to offer what they call participating policies. This means the policy owner gets a supposed dividend back. Unfortunately this is not a true dividend which would represent a share in profits, but instead is a rebate of overpayment on the policy. So the company overcharges for the policy and may or may not give some of it back.

Universal Life

Universal Life is a less often sold product, but has just as many or more traps than whole insurance. It was sold as more of an investment, but in reality tends to bankrupt itself because of poor rates of return. It is a confusing policy, which is in its favour for selling, as few consumers understand what they are buying. Once again, advocates say to avoid it.

Don’t Insure Children

Another cash cow for the life insurance business is to insure children. This does not make sense, as the purpose of insurance is to replace income. Although they are billed as long term savings products, there are much better ways to achieve this.

Term Insurance and Invest the Difference

As mentioned earlier, the most cost effective method of insurance is simple term insurance. It should be level premiums for twenty years at a time, renewable, and be affordable throughout the life of the policy. The cost difference between the term insurance and the whole life insurance would be better invested separately. This way the insurance and savings which have different goals can be kept separate.

Eliminating the Need for Insurance

At some point in life, if the principles of sound financial planning are followed, the policy holder shouldn’t need insurance. Insurance is designed to replace lost income in the case of a death. At a point in the future when the mortgage and loans are paid off, the children have flown away, and there is a nest egg of savings, insurance should not be needed. This should be the goal of every policy holder.

Combating Consumer Confusion

The insurance industry thrives on consumer confusion and ignorance. It is much easier to sell a bad product when the consumer is in the dark. This is why it is important for the potential buyer to do their homework. One of the classic and easy to read books is The Wealthy Barber.

References

The Wealthy Barber, David Chilton, Three Rivers Press, 1997

The Canadian’s Guide to Life Insurance, William E McLeod, 6th Ed.

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