There are two basic types of life insurance, term life and permanent life. The titles make good sense, in that the term life insurance policies are for set time limits such as 10, 15 or 20 years. These policies are generally much less expensive than permanent policies, but they do not accrue interest, build savings or pay any dividends. The permanent policies, most notably whole life, universal life and variable life, are for the entire lifetime of the insured. In this list we have concentrated on financial aspects and effects of whole life policies, since they are the most familiar and popular of the permanent policies. While whole life policies do have the pluses related to building on money invested, they are certainly not for everybody, and here are some of the reasons why they aren’t.
- Cost – Permanent life insurance policies are much more expensive than term life plans, and this alone puts whole life programs out of the reach of many families.
- Versatility – Whole life policies aren’t adaptable to changing economic or personal situations in the same way that term life policies can be.
- Control – With a whole life policy you have no control over how your money is invested. This may not be a problem if your insurer maintains a good track record, but if the markets go bad your policy could be affected.
- Do Better Yourself? – Typically, insurance companies are very conservative with their investments, so if you are any good with your own investments chances are that your money will perform better in your hands than in the hands of an insurance company.
- Default – If your financial situation takes a turn for the worse, not an unusual occurrence these days, then you may not be able to cover the cost of your premiums with whole life insurance, and you could lose all or most of what you’ve already paid in.
- Risk – Insurance policies are only as good as the company that sells them, and one reason you pay the big bucks for a whole life policy is that the stability it offers is something you can count on even beyond your own life. If a company goes under, and it happens, you could face serious financial consequences.
- Etched in Stone – Once you set the amount of your death benefit you won’t be able to change it.
- Accessing Funds – It is true that you will be able to access some of your insurance investment when it has matured and grown for long enough, but taking money out isn’t nearly as straightforward or simple as making a bank withdrawal.
- Complicated – Whole life and other permanent life insurance policies are much more difficult to construct, because they are meant to last a lifetime. Usually this means you will be well advised to consult with an insurance professional if you are choosing whole life.
- Hard Sell – An insurance company makes more money from more expensive permanent policies, such as whole life insurance, than they do from a term life policy, so most will try to up-sell you, even if it may not be in your best financial interests.
For many people, and for a major portion of their lives, whole life insurance may not make enough financial sense.