Problems with a Whole Life Policy

Filed in archive Information About on May 30, 2010

© Steve Polyak

When you buy life insurance, there are two basic kinds - whole life and term life insurance. Any other kind of life insurance is a variation of these two types. While term life insurance focuses on low cost, whole life focuses on having a cash flow or forced savings for retirement.

Each of these life insurance policies will meet different people's needs. However, whole life seems to fall short in several ways. While it does have a cash value that builds over time, it also is very poor when it comes to a return on your investment. If you really want a savings program that you can keep, a whole life insurance policy does not qualify.

With a term life insurance policy you get the pure insurance that you pay for. There are no other claims and the commissions are kept low. If you should die, you get the face value of the policy.

A whole life policy, on the other hand, promises insurance plus a cash value. The truth, however, is that you really only get one or the other in a standard whole life insurance policy. This is because the cash value portion actually is part of the face value. If you should die, your beneficiaries only receive the face value of the policy. This does not matter whether you have had the policy for one week or for 50 years. You do not receive the cash value and the death benefit.

When you consider how much you paid for whole life rather than term insurance, you would think that you could have had a lot of money saved over the years. Yes, that's true. Instead, it only means that you end up insuring yourself.

SmartMoney mentions that "there really are better ways to save for retirement," if that is your goal. You really would be much better off buying term life insurance and investing the difference into a savings program of some kind. This way, you will really get the insurance value and the savings account, too.