Are you a senior wondering about insurance? Is whole life insurance a rip off? What kind of insurance should you have?
Did you read ads for whole life insurance where there is no medical exam or health questions asked?
Read further to find the answer to these questions, and more!
What is whole life insurance?
As the name implies, the insurance policy covers the insured for life. It pays a death benefit and a savings where cash value accrues. Most companies claim the premiums are “locked in” and therefore will not change or increase.
They usually state they will pay your beneficiary directly when you die. They also state your policy can not be canceled no matter what, including if your health changes. In addition, whole life claims that it should cover your funeral expenses, or at least help cover them.
Whole life has a death benefit that will pay whenever you die.
What is Term Life Insurance?
This type of insurance is the alternative to whole life insurance. It covers a set term for a set amount of time (usually 10-30 years). If you die during the term, the benefits are paid out. It is more affordable than whole life. Whole life premiums can be up to 10 times more expensive.
But there is no cash value for term insurance. The premiums are based on the insured’s health, age, and gender. It is an insurance policy, period. You are purchasing it to cover death expenses and possibly outstanding debts.
I included this explanation before I continue with whole life insurance.
No insurance policy should be considered an investment.
Why would I need insurance?
You want to make sure that there will be some monetary benefit for your family when you die, so you get an insurance policy. The whole life promises the benefits are paid directly and this type of insurance builds cash value.
So you believe you are taking care of your family when you pass away. But is this the wisest choice?
Who should have insurance?
Having insurance should help your survivors cover expenses of your death and hopefully other financial commitments. If you are married or have children, it makes sense to have money available to take care of your family when you die. Enter the insurance companies!
Insurance companies use the premiums you pay them to provide a payout if you should die with surviving beneficiaries. The higher the promised payout, the higher your premiums.
An insurance policy should provide for the goals of the owner of the policy. What do you want to accomplish with the policy?
What kind of insurance should I have?
Trends are that if you are just starting a family and are younger than 45 years of age, then term insurance is the way to go. Whole life seems to appeal to the older set; after reaching 45 and without children in the house.
How should I buy life insurance?
Shop around! Just about any insurance company will sell you any type of insurance, along with car insurance, homeowner’s insurance, and so on. But read the small print and make sure you understand what it means!
My friend says that most savvy insurance agents will find out how much you can afford and then use that as a basis for what to offer you. Not what is best for you, but what you can afford. That is just criminal as far as I can see. He obviously is suspicious of insurance agents!
So go in with your eyes wide open.
But read further for why whole life insurance is a rip off.
Why is whole life insurance a rip off?
If you pay for months until you die, the longer you pay for it, the more likely it is you are getting back your own money. So you have self insured yourself. Or basically put that money away like a savings account. Except the percentage you are “earning” is low.
If you knew how long you would live, you could open a savings account and do the same thing. As long as you live, it is in the insurance company’s favor. And most of us want to live as long as possible and are making healthy choices to do so.
Premiums cost more for whole life than term insurance. Term premiums are less. Live longer than the term, you can renew it for a higher premium but you have saved in the amount of premiums.
Whole life returns are not guaranteed and they take a while to get to a positive level. You can also be penalized for stopping the premiums and/or withdrawing from the policy. Find out about cash value; or what you would get back if you cashed out the policy.
Here is an excellent article about why whole life insurance is a bad investment.
Read the ads! Read the small print! Know what all the terms mean.
The company I was looking at, United of Omaha Insurance Company and Companion Life Insurance had a disclaimer in their ad! Exclusions include a reduction in death benefits during the first two years of policy ownership! What? Which basically is saying, “We gotta get our money out of you before you get it back”.
What’s a Better Choice?
Perhaps a better choice is a mutual fund. Read the chart to compare a whole life policy with a mutual fund account.
For an objective comparison let’s call whole life insurance Bank A, and a Mutual Fund account Bank B. (I am not comparing whole life to term.) See why a mutual fund is a better option.
|Bank A||Bank B|
|Return on savings between 1 and 5%.||Return on savings between 7 – 25%.|
|The fee to borrow your money is only 6 – 8%.||No fee to withdraw your money.|
|Reserves the right to defer a loan or a withdrawal of your own money for up to six months.||When you request a withdrawal, by law they must issue you a check for the amount requested within 7 days.|
|Does not qualify for any qualified plan, i.e. IRA, Keogh, SEPP, 401(k), Profit Sharing||Qualifies for any qualified plan, i.e. IRA, Keogh, SEPP, 403B, Profit Sharing|
|Keeps your first year deposit for allowing you to save in their program.||Deposits first year and on are credited to your account.|
|If you should die during the probationary period while involved in this savings program the institution will keep all your money.||If you should die while involved in this savings program your family will receive all your money.|
Basically, whole life benefits the insurance company and not the insured. They take your money, give you an insurance policy, invest how they want and make all kinds of restrictions on getting anything back.
If you have no dependents, are single, and have covered your death expenses, you don’t need insurance!
Here’s a great video with Dave Ramsey talking about whole life insurance.
Calculate what insurance you need.
To figure out what insurance you need, go to this website link in Life Happens. They have a calculator that will walk you through how to calculate what is best for you. They are a non profit organization, so you should get the right information without a hard sales pitch.
I am not an insurance agent or a financial advisor. I have just spent time in an attempt to understand what whole life insurance is, and why people say it is a ripoff. I recommend you talk to a reputable financial advisor to make an informed insurance decision.
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If you disagree with me, let me know! I am open to correction. If you agree, let me know. If you have further questions, please leave the question in the comments.