When we question the investment experts about whole life insurance as an investment we get a mixed set of reactions about it being good or bad! They have formed their consensual views on the basis of certain aspects related to the investment.
Whole life insurance is considered as a “good” investment option in most of the cases.
Let us understand in detail about the pros and cons of whole life insurance and then we let our readers decide whether the whole life insurance is a good or bad investment.
Basic Understanding of Whole Life Insurance
In a layman’s words, the concept of whole life insurance is quite simple- we buy insurance and pay monthly/quarterly/ bi-annually or annually premiums to the company.
In return, they pay a sum of cash as promised at the time of signing the policy, in case of death of the policyholder.
As it sounds quite evitable on the surface the things get judgemental when we start discussing the ‘investment part’ of the policy and then compare the other available options with the plan.
Term life insurance policy is one of the preferred alternative options to a whole life insurance plan.
In this type of plan, we pay a scheduled premium towards the life insurance with a time frame of policy turnover.
When that time period gets over, you get your money back along with the accumulated rate of interest. The life is insured only within the limits of the time period of the policy.
People generally compare these two policies and try to determine what the best available option is for them.
In order to help you decide whether a whole policy is good or bad for you, let us state some advantages and disadvantages of whole life policy.
Advantages You Should Consider
Availing the Loan & Investment
Although it is considered that your money gets bound in whole life plan investment but you can avail loan as and when needed on your policy.
The advantage lies in the rate of interest that keeps on being levied to the cash value build up in the policy while you can take out the money in the form of a loan and pay it back at your convenience.
In one way you are using your own money in the time of need which is not a very easy leverage in other investment options.
Partial Withdrawal Terms
Up to a certain level of the cash value, you can withdraw some money from your policy.
There may be a withdrawal fee and a limit to the amount of money that one can withdraw and the cash withdrawn will also get deducted from the promised death benefit amount.
The advantage lies in the tax-free withdrawal that you can enjoy anytime when there is a financial need to cater to! The policy acts as your back up saving plan.
Many of you must be aware that whole life policies are not merely investments for ensuring life but they also help you in saving the tax.
You save the tax money while letting it benefit your assets- whole life plan being one of them.
You Can Sell the Policy
There are situations when people do not require the insurance policy at all.
For example, if the couple gets divorced and the spouse does not need to be nominated in the policy at all or any other circumstances- the policy can be sold on to another buyer at good rates.
You can sell it at a price higher than its cash value and lower than the death benefits as promised in the policy.
This can be done by approaching the insurance company to find out several modes of the life insurance settlement.
You Can Surrender the Policy
If you do not need policy anymore and you do not find a buyer for it too, then you have another option of surrendering your policy to get the life insurance settlement done.
In this case, you will get the cash value to build up in your policy and will surrender the death benefits to the insurance company.
There can be some surrender fee levied to it that can be checked with the insurance firm.
No Guarantee of Returns
Usually, the insurance agents try to convince their prospective customers by putting forth a “high return investment” picture on the policy. If compared to term insurance the rate of return is significantly lower on whole life insurance.
Secondly, if you will wait for the equities, bonds or the mutual funds in whichever your policy is dealing, these returns are completely subject to market risk.
It implies that if you want to surrender your policy at any point of time and take the cash value back, there are high chances that returns may not have accumulated any rate of interest.
And there may be circumstances that your cash built up is into negative instead -if you surrender the policy abruptly without checking on the status of your money.
However, people generally do not surrender the policy because the highlights of the whole life insurance policy are more towards ensuring the lives of loved ones and tax saving.
While we learn a lot about “money diversification portfolio”, the whole life insurance plan is a quite limited subject.
Although the insurance policy is entirely different from any other market investment tools yet we are practically dedicating a significant part of our money into an investment that will probably not provide higher returns too.
Your return through the policy is purely at the discretion of the insurance company whether how much profit sharing they want to do with their customers.
However, the death benefits seem to overlap the policy return benefits in this process. As the plan provides a financial assurance against circumstances of uncertainty and untimely death to the family, returns are compromised.
People have their own judgments about whole life insurance policy being good or bad. We stand with the point that returns are probably not good on the policy.
At the same time, we insist that more than returns it is the purpose of whole life insurance which is important- death benefits to the loved ones.
This is the reason that we are more inclined towards considering it as a “good” investment than bad.