Whole Life Insurance – When Should You Purchase?
When it comes to life insurance, timing is crucial.
However, since nobody really knows how long they’ll live, there’s no universal right answer when it comes to the question, “When should I purchase life insurance?”
It all boils down to the person’s situation, needs and preferences. One person might be purchasing life insurance for the sole purpose of income replacement since they’ve just had a baby. Another might be looking to augment her retirement nest egg because she’s about to retire. Or maybe a couple has already maxed out their savings and retirement plans and is eyeing a universal life policy for its cash value feature.
Insurance can mean different things to different people, which is why it’s crucial to understand the triggers that drive their choices and behavior in purchasing a policy.
In this article, we’ll try to provide a more flexible response to one of the most oft-asked questions when it comes to purchasing life insurance, ”When should I purchase a whole life insurance policy?”
What Is Whole Life Insurance?
Whole life insurance is a type of permanent insurance that features a cash value component and guarantees lifetime of protection (as long as premiums are paid).
Compared to term insurance, which only lasts for a certain period of time (10, 20, 30 years), whole life covers you for your entire life and features a savings component as well.
What is a savings component, you ask?
I’m referring to the Cash Value. It’s essentially a portion of the money taken from the premiums you pay that the insurance company invests in various forms in order for it to grow.
Where the company will invest the cash value will depend on the risk that you opted for (aggressive, conservative, balanced, etc.,). It’s similar to mutual fund investing, the only difference being it’s going to be taken from your premiums and the insurance company will do it for you.
And, it’s mainly because of the cash value that whole life insurance is more expensive than term. A term policy is “pure insurance”, meaning everything that you pay for goes towards the premiums and nothing else.
With whole life, you can leave your beneficiaries with financial support. And at the same time, have a “savings fund” that you can use for emergency expenses. Or you can use it for anything else you may need. However, the trade-off is more expensive premiums.
But we’re getting ahead of ourselves. To get a better picture if whole life fits your needs, let’s take a closer look at its pros and cons.
Pros and Cons of Whole Life Insurance
Let’s take a closer look at the pros and cons of a whole life policy. We can get a better grasp of how it works and the factors to consider before purchasing one.
Advantages of Whole Life Insurance:
As long as you’re paying premiums, you will get the death benefit for your beneficiaries when you pass away. The policy won’t expire as long as you’re able to meet the contract’s premium and conditions.
Imagine having a passive way of building additional cash. Why passive? Because the investing part will be handled for you by your insurance company (depending on your risk preference). You can utilize it for any sort of need you might have. Or, use it to pay off your premiums once it has built up enough assets to sustain regular premium deductions.
Premiums can be locked in
How much you’ll pay on a regular basis remains constant throughout the entire length of the policy. That is, unless you choose otherwise. This can be an advantage for those who purchase whole life early. Because, premiums will be lower versus when you get it at a later age.
No additional medical exams
Most insurance companies promise a no-additional-medical-exam-required rule for their whole life policyholders. This is not to be confused with the original medical exam during application. This means they won’t be assessed again and be quoted at a different rate. And, since there’s definitely a decline in health as we grow older, this is a big plus.
While you’re still alive, the portion of premiums that go into the cash value are tax-exempt. It grants estate tax savings for your beneficiaries upon death.
Disadvantages of Whole Life Insurance:
More expensive versus Term
The biggest factor that sways people away from whole life is its cost. Typical whole life policies cost around 5 to 10 times more than regular term life insurance. The price of premiums are absolutely critical. It’s a big factor in determining your capacity in maintaining your policy’s regular payments.
Imagine being able to pay for it in the first 10 years (since you’re still working) but start missing out on the payments after you retire (limited source of income) and end up losing it altogether. And, that’s why it’s important to carefully assess your ability to pay the higher premiums that go with whole life coverage.
The cash value portion in a whole life policy is invested and managed by the insurance company. They charge management fees for this. Also, whole life pays higher commissions to the broker, which also adds up to the overall cost.
Note that these are standard. So, when you’re shopping, it’s best to discuss it with your financial advisor. This is so you’ll know exactly how fees and other charges are structured within the premiums.
More complex than other insurance products
With term life, you pick the length of coverage and pay the corresponding premium. Unless you’re adding riders, it’s a pretty straightforward affair. With whole life (and other permanent life options), there are more things to know about. That is because you will also be investing your money.
Interest rates, fees, dividends, and other related items are part of a whole life policy. Understanding and learning about them will require more effort. But, it is essential if you want to make the best out of it.
Limited control over investment choices
Other forms of permanent insurance like Universal and Variable Universal Life Insurance offer more flexibility over how you want the cash value invested. However, your options are still limited based on the type of whole life insurance and investment options the company offers. You’ll typically choose based on your risk appetite but not on the fund level.
Potentially large surrender fees
Surrender fees are essentially penalties that are incurred when you opt to stop the policy or cash in early. You have to stay in the policy for at least a few years. This is to avoid the hefty penalties from dropping the policy early.
When Should You Purchase Whole Life Insurance?
Now that you are aware of whole life’s pros and cons, it’s time to answer the big question:
When should you purchase whole life insurance?
As we’ve mentioned earlier, your answer will depend on your current and future needs, along with your financial capacity. So, instead of one blanket answer trying to pinpoint when’s the best time to purchase, we’re listing various scenarios and situations when it will make the most sense to get whole life insurance.
Scenario 1: Forced savings when you’re young
Having the discipline to save while we’re young is not easy. One way you can justify getting insurance early in life (whole life to be exact), is the cash value feature. It has the potential to grow and build a nice savings fund that you can access when you need or want to.
Think about it, you can lock in a policy that protects you for your entire life. And, also have some funds to spare for whatever reason. Once it’s large enough and able to generate significant earnings, the cash value can even pay for the premiums.
Scenario 2: Leave a sizeable death benefit regardless of age
If you want to provide a significant amount of money to your loved ones when you pass away, regardless of age, whole life is a good option for financing it. With whole life, you won’t have to worry on the policy expiring as there’s literally no term length limit.
Whole life can secure a death benefit for a special needs child, for example. Time and age won’t be a concern. That is because you know they’ll get the benefit as long as the policy is in effect.
Another reason why whole life could be advantageous over term is if you have family health issues. Most whole life policies offer riders that let you increase the death benefit without the need for additional testing.
If you outlive a term policy, and want to renew it, then be ready to pay a lot more in premiums. This is because of the higher risk rating you’ll receive when you get re-assessed.
Scenario 3: Additional investment vehicle
If you’re someone who maxes out a 401k and IRA and have significant assets stashed already on savings, getting a whole life policy lets you have an additional means of saving with tax-deferral. Cash value assets are tax-free when borrowed against, giving you an additional incentive for keeping funds in it as well.
While in general, most people don’t have this as the main reason for getting whole life insurance, it does offer some form of savings plus investment capability that has the potential to give better returns than a savings account. If you’re in a great financial position already and have established a strong retirement plan, then whole life’s promise of lifetime protection along with the savings option are worth considering.
Scenario 4: No need to renew with a different rate
If you’re worried about re-negotiating your policy when it expires, then whole life is one way of avoiding that. Term life insurance is cheaper at the onset but once it’s time to renew, you will be assessed with a different premium rate since you are now older. Depending on when you signed up for whole life, you might be able to lock in a decent rate that may be equal or even less than what you’ll be quoted for a renewed term.
Scenario 5: For preserving your estate
When it comes to preserving your legacy, whole life is a better choice. If you have a large enough estate, you could be subject to estate taxes. These taxes can eat up your assets if you’re not prepared. One of the best ways to ensure your beneficiaries will receive something when you pass away is getting whole life insurance.
With the benefit, you can guarantee that your surviving partner, spouse, or children will have the necessary funds to replace your income, cover any outstanding debt, pay for education, daily living expenses, and preserve funds so you can make sure there’s fair and equal distribution of your estate among heirs. Estate taxes, probate fees, capital gains tax, taxes associated with registered retirement plans such as RRSPs or RRIFs can be covered with the benefit from your whole life insurance.
If you own a business, whole life insurance provides a great way for your surviving family members to continue with its operation. They can use the funds from your death benefit to cover the expenses mentioned above. That way they won’t have to sell the business in case you have debt or other significant liabilities.
The Bottom Line
In deciding when to buy whole life insurance, your answer will mainly depend on your current and future financial goals. There’s no exact age and time when you should purchase it, that varies from person to person.
The key is to know what exactly you’re going to be using it for. If you need help in maximizing your use of whole life insurance, our professional life insurance agents will be more than happy to help.