Why Whole Life Insurance Is A Bad Investment and 5 Better Options

Whole life insurance coverage is not a good investment. That is the harsh reality that most people have learned the hard way. Most people pursue the cash value type life insurance for the death benefit paid. Likewise, the cash value accumulated at times acts as savings and can be borrowed against.

Whole life insurance products are designed to provide coverage for the entire life and not a specific period. They also come with a minimum return rate of cash value, which acts as an investment portion. The fact that premiums remain constant throughout the coverage makes the insurance product highly attractive to most people looking for life coverage.

However, there is a reason why 20% of whole life insurance policies are terminated within the first three years, while 40% are terminated within the first ten years. In addition to costing ten times more than other life insurance coverage, whole life insurance policies struggle to generate significant returns as other investment products.

Why Whole Life Insurance Is a Bad Investment

Whole life insurance coverage has proved to be an unreliable investment product for doubling any invested capital. In most cases, the life insurance policy has proved to eat away the client’s returns within the first three to four years, given the high agent commissions as well as company fees. Returns of between 2% and 4% are a no match to what other investments generate over the same duration.

Similarly, whole life insurance is an undiversified investment. What this means is that you are investing a sizeable amount of money on a single company. The investment risk, in this case, is high given that one is always at risk of losing everything on something going wrong. By investing in a whole life insurance policy, you are essentially at the mercy of the insurance company, which makes the final decision on where to invest the paid premiums.

While whole life insurance sales representatives always talk about the returns up for grabs, it is important to note that such returns are not guaranteed. The long-term rosy returns always touted are simply projections that might never come to fruition.

The illiquid nature of the whole life insurance policy is another reason to avoid them for investment purposes. Such policies are illiquid in the sense that it is impossible to generate substantial returns in the first decade upon signing up. Likewise, the policies come with a surrender charge that must be paid on terminating the policy before maturity.

According to Mack Dudayev of InsureChance, Whole Life may be costing you valuable investment dollars. Here is what he had to say: 

“It shouldn’t be a surprise that whole life insurance premiums can be as much as 10 times the cost of a term life insurance policy carrying the same death benefit. Life insurance is largely purchased by the middle class: consumers with mortgages, bills, and kids to take care of. One of the most popular advertising tactics in the life insurance world is to compare the cost of a policy with a daily trip to the coffee shop. In reality, it will take more than cutting out that daily trip to afford a whole life insurance policy.” 

Instead of taking a whole life insurance policy for investment purposes, one can consider other investment products in the capital markets that guarantee hefty returns over a short duration.

Whole Life Insurance Alternative Investments

While Whole Life may not be for everyone, here are some examples of other options where you can put that money you save on whole life premiums. 

Real Estate Investment Trusts (REITS)

Instead of investing in whole life insurance coverage, it might be wise to invest in quality Real Estate Investment Trust. REITs are simply companies that own and manage real estate properties. For income-focused investors, REITS are ideal as they pass most of their income to investors in the form of dividends.

REITs also stand out in part because they do not incur taxes, thus pass maximum returns to shareholders. In addition, they provide an easy way of owning real estate properties without having to contend with the hassle of managing them. REITs are especially ideal for retirees looking for a reliable source of passive income.

REITs supersede whole life insurance policies on the investment front on the fact that they are extremely liquid. What this means is that one can convert their investment into cash, outright, as long as the market is open.

Index Fund

Index Fund would also be ideal investment products as opposed to whole life insurance policies. Index funds such as the S&P 500 and the Nasdaq 100 stand out on the fact that they are extremely diversified. The funds provide investors with exposure to a wide array of stocks as well as stocks.

The S&P 500, for instance, is made up of 500 of the largest companies in America. For that reason, one or two stocks underperforming would most of them be offset’ by other stocks outperforming the overall market. Index funds also stand out given the high levels of liquidity they come with, as well as the low expense ratios they come with. In addition, they tend to generate an average of 10% in annual returns.

High Yield Savings Accounts

High yield online savings accounts beat whole life insurance coverage when it comes to returns. Just like other savings accounts, high yield savings accounts provide investors a platform to lend money in exchange for high-interest rates.

In addition to higher interest rates, high yield online savings accounts come with lower overhead costs, unlike whole life insurance coverage, thus ensuring investors always end up with optimum returns. Such savings account are also as liquid as they can come, which simplifies the process of getting money in and out.

Dividend-Paying Stocks

Instead of investing in whole life insurance policies, it might be wise to invest in high paying dividend stocks to enjoy consistent income over time. Dividend-paying stocks provide an easy way of benefiting from long-term market appreciation.

The fact that dividends are mostly paid on a quarterly basis should suit any investor looking for immediate income. Unlike whole life insurance, dividend-paying stocks are liquid, which makes it possible to buy and offload the stocks at any given time.

Government Bonds and Treasury Bills

When it comes to secure and guaranteed’ investments, nothing beats government bonds and treasury bills. Governments issue various types of securities from time to time in a bid to raise money for financing various projects.

Government bonds and treasury bills are some of the safest investments given the backing of the government they come with. In addition, they allow investors to earn interest rates at least twice a year. Upon maturity, one is always sure to get their capital back. Treasury bills and government bonds are liquid as well.

Bottom Line

While investing can be a great way of growing wealth, it is important to invest in the right products if one is to enjoy high returns at a lower risk. While whole life insurance coverage comes with an investment aspect, they are not the best for investors looking to generate significant returns over a short period. The lack of diversification, low liquidity as well as high overhead costs is some of the other downsides that any investor should take into consideration.

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