Just Say NO to Whole Life


I had several inquiries from readers regarding which life insurance is the best option for them.  Instead of answering each question individually, I opted to write this post.  By the end of this short read, you should have the answers to the following 2 questions:

  1. Do you need life insurance?
  2. Should you get “term” or “whole” life insurance?  Hint: You should ALMOST NEVER buy whole life insurance.

What is life insurance?

Life insurance is conceptually simple.  Just like you buy auto insurance to cover in case you get into a car accident, you buy life insurance to cover in case you die.  Unfortunately, that’s where the simplicity ends.  The financial industry has gone to great length to create many products based on this basic concept, some of which can get confusing quickly.  Before we get into the weeds, let’s addressed the biggest question first:

Do you need life insurance?

Life insurance gives your designated beneficiary(s) a payout in case you die while under coverage.  If you have a family (spouse, kids, pets etc.) for which you are the main breadwinner, then you should consider life insurance.  In other words, if you have people whose quality of life would be adversely affected by you dying (losing your income), then you should get life insurance.  If no one else depends on your income, then you don’t need life insurance.

Term vs. Whole Life Insurance

There are a lot of different types of life insurances that may have been paraded before you by your local insurance agent.  Let’s take most of the complexity out of it.  As far as you are concerned, consider there are only 2 types of life insurances.

  1. Term life insurance – think of this like car insurance that you buy every 6 months.  You buy life insurance to cover a pre-defined period of your life (term) and your beneficiary gets paid if you die during that period of time.  The terms usually come in longer periods compared to car insurance – 10, 20 years etc.  You pay a set premium during the “term” depending on your likelihood of dying (age, sex, health condition, smoking, alcohol etc.) and if you have the good fortune to not die during the term, you have the option to purchase another policy by the end of the term.  Simple, right?
  2. Whole life insurance – also referred to as “permanent” life insurance, whole life insurance covers you for the rest of your life, hence “whole” life.  Unless you know something I don’t, you will die.  When you do, your beneficiary WILL receive a payout.  In addition to the guaranteed payout, whole life insurance policies set aside a portion of your premium into an investment account that grows tax-free – a type of forced savings plan like social security.  There are many derivatives of whole life such as universal life, variable life, and universal variable life.  For now, just think of them all as whole life.

Why you should NOT buy whole life insurance

After you read the above descriptions, you may come to the conclusion that whole life insurance sounds like the sweeter deal - not only does your beneficiary get a guaranteed payout, they'll also invest your money and help it grow.  You would be WRONG, for the following reasons:

  1. Premiums are higher for whole life insurance – this makes perfect sense as the insurance company is insuring against a certainty – you will die.  Rather than a possibility of you dying during a pre-defined period in term life insurance.  On top of the higher premiums to begin with, you also have to pay for the rest of your life!
  2. Whole life insurance invests part of your premium, this is called building a cash value.  However, what the insurance companies are not telling you is that while your money is being managed, they are charging you massive management fees for this privilege, sometimes so much that they wipe out any appreciable gains you earn from the investment itself.  Each policy is different from the next but fees in excess of 3% are not uncommon.
  3. No reasonable person needs life insurance for the rest of his/her life.  What do I mean by that?  Think of it this way, when you’re starting your career, your income is very important to your family.  You need life insurance because losing your income during this time would be devastating to your family.  But as you pay down debt and acquire assets with the progression of your career, you gradually reach a point where even the total loss of your income would not significantly impact your family’s financial well-being.  In essence, you reach a point you no longer need to buy life insurance because you are now self insured.

Take home points

If someone you care for would suffer significantly (financially) by you dying, then you should consider purchasing life insurance.  When you decide to buy life insurance, you should comparison shop between term life insurance policies and NOT whole life insurance.  There are very few situations in which whole life insurance or one of its derivative policies makes sense.  If you are in one of those situations which means you are extremely wealthy, you should stop reading and consider becoming a sponsor of the blog instead :).    

Future Proof, MD

Dr. Bo Liu is an aspiring radiologist-in-training and the founder and editor of the White Coat Money Blog.  He has an interest in interventional radiology and helping his medical colleagues get ahead in this mad world of medicine and money.  When he's not crushing the list at the PACS station or typing up your next favorite blog post, you can usually find him at the local badminton club, movie theater or the most recently opened restaurant.