Arguably, the most debated issue among life insurance consumers is whether whole life insurance is a good investment or whether you should instead go with a term insurance plan. This is the “To Be, Or Not to Be?” of the life insurance industry, as life insurance experts and personal finance columnists come down on either side of the issue with equal vehemence.
In an effort to bring clarity to the two opposing views and try to clear up the cluttered debate so that the layman can understand it, we’ve taken the liberty of clearly outlining both sides below.
Whole Life Insurance Pros
- While whole life insurance offers the same protection and security as term insurance, it also offers an additional investment component inside the policy. The whole life policies with an investment component are called Participating Whole Life Policies and those without are called Non-Participating Whole Life Policies.
- According to an article in The Financial Post, more and more investors are using participating life insurance to improve returns and reduce risk in their financial portfolios. If you already have an insurance need and your financial portfolio is at least 40% fixed-income, John Nicola, CEO of Nicola Wealth Management in Vancouver, recommends participating whole life insurance as a sound investment.
- The policy comes with guaranteed cash values and annual policyholder dividends. The cash values are invested in, what the Financial Post terms a, “professionally managed, diversified investment pool” that often include stocks, bonds and alternative investments such as real estate. These investments are then stored on a tax-sheltered basis.
- The investment component of Participating Whole Life may actually out perform traditional investments because the investment fund is big enough that the management fees are much lower than they are on more traditional investments, like ETFs and commission-based mutual funds. Also, part of the premium is put back into the investment component and the insurance company guarantees the value of the investment. So, even though the value of the investment components within the policy may change, there is no risk to the policyholder like their would be with traditional investments.
Whole Life Insurance Cons
- Whole life insurance premiums are more expensive than term insurance premiums. Sometimes they can be up to ten times more expensive than term. However, the premiums on term increase with every renewal, while the premiums on whole life insurance stay the same for the life of the policy, which may take the sting out of the initial expense.
- While steady, the actual rate of return on the investment component of participating whole life insurance isn’t all that great. With the low risk, you also have to expect returns that aren’t as potentially lucrative as traditional investments. The insurance company also determines what percentage of the premiums your paying are invested. Unlike traditional investments, you have no control over that aspect, so if you like to take a more active role in your investment portfolio, Participating Whole Life Insurance is probably not for you. It also goes without saying that you are not able to select what the investable portion of your premium is invested in an individual basis.
- Permanent insurance is not an insurance product for most people or most situations you would use insurance for. It’s a very complex product for a regular person and is inappropriate for certain situations. Permanent insurance is for permanent financial obligations that are much more long-term. If you are covering short-term financial obligations, such as a mortgage, a loan or to cover your children and still support them until they become adults in the event of your death, then term insurance is the much more appropriate and preferred option. If you’re going to get a Participating Whole Life Insurance Policy, make sure you are doing it after it has been thoroughly explained to you by an independent broker.
