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The Drawbacks to Whole Life Insurance

Whole life insurance is a form of permanent insurance that stays with you for life and includes an investment component known as a cash value account. While whole life insurance has its merits as a long-term financial planning tool[1], it is essential to be aware of the potential drawbacks as well.


Here are eight common drawbacks to whole life insurance policies. Understanding these challenges will help you make an informed decision when considering your own life insurance options.

  1. High Premiums: One significant disadvantage of whole life insurance is the considerably higher premiums compared to term life insurance. From my experience, whole life insurance premiums are 15-20 times more than an equivalent amount of term life insurance.
  2. Limited Flexibility: Whole life insurance policies typically offer limited flexibility in terms of coverage adjustments. As your financial situation and needs change over time, you may find yourself locked into a policy that no longer aligns with your goals.
  3. Cash Value Accumulation: While whole life insurance policies accrue cash value over time, it’s crucial to be aware that the growth is relatively slow, especially during the early years. In many policies, the cash value build-up is near $0 for the first three years due to the sales commission you paid
  4. Surrender Charges: If you do want to cash out the whole life insurance policy before you die, you won’t get the entire amount in your cash value account. If you surrender your policy, you’ll get what’s referred to as a “surrender value” of the account, which can be fraction of the total amount in the early years of the policy.
  5. Opportunity Cost: By investing a substantial amount in whole life insurance premiums, you may miss out on alternative investment opportunities that could yield higher returns. It’s essential to carefully evaluate the potential opportunity cost of allocating funds to a whole life policy.
  6. Complexity: Whole life insurance policies can be complex, with various components, fees, and riders. Understanding all the intricacies and fine print can be challenging for the average policyholder. It’s not surprising that most people with whole life insurance don’t fully understand what exactly they own and why.
  7. Underinsurance: as mentioned above, whole life insurance is considerably more expensive than term life insurance, resulting in most policyholders being underinsured vs. what their family members would need in the event of their death.
  8. Limited Need for Coverage: Whole life insurance provides coverage for the entire lifetime of the insured. However, in most cases, coverage needs are temporary, such as for mortgage protection or income replacement until retirement. In such instances, term life insurance is often the more suitable and cost-effective option.


The Bottom Line

While whole life insurance can provide permanent coverage and some financial benefits, it is much less attractive without some permanent need for the death benefit. The high premiums (relative to term life insurance), limited flexibility (relative to universal life insurance), and complex nature of these policies are a few of the more important drawbacks to be aware of. Evaluating your long-term financial goals, comparing various life insurance options, and being able to clearly articulate why you need the whole life policy can go a long way towards helping you make the right life insurance purchase.


Further reading:

Is Permanent Life Insurance a Good Way to Save for Retirement?

[1]For example, if your estate is illiquid (e.g., a family business or real estate holdings) and you don’t want your heirs to have to sell to divide up the proceeds, or if you have a disabled dependent and you want to ensure there are sufficient funds for his or her care after you die.

Picture of Mark Haser, M.B.A., CFP®
Mark Haser, M.B.A., CFP®
Mark is a Partner and Wealth Advisor with Artemis Financial Advisors LLC. He has an MBA from Boston College’s Carroll School of Management and is a Certified Financial Planner (CFP®) professional. Mark helps physicians and high-income families to optimize their cash flow, minimize taxes, and build a plan for long-term financial success.

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