Why I Love My Whole Life Insurance Policy

At any given family or social event, once someone knows I am a financial planner I always get pulled to the side to answer some burning personal finance question. I can sympathize with doctors.

I usually get asked about the market or some stock, but if I am engaged in the conversation long enough I almost always get asked about whole life insurance. It usually starts off as, "My (brother-in-law, neighbor, college buddy — fill in the blank) keeps bugging me about this whole life insurance, what do you think? Should I buy it?" I love when people I just meet ask me this, as if I can crunch the numbers on the spot and do a full-blown analysis over a few cocktails.

What I usually tell them is something short and polite, like “it depends” or “there are pros and cons,” so as not to give unsuitable advice. But if they keep digging and are genuinely interested, I tell them upfront and honestly, that buying a whole life policy was one of the best financial planning decisions I ever made, and in fact I just bought more on my myself and my wife. In full disclosure, I am a financial planner licensed to sell insurance, however I sincerely believe in the product, having owned it myself.

What a Whole Life Policy Did for Me

Here's what I tell them:

1. Whole life forced me to save. I've owned my policy for about 10 years now, and the cash value (or equity inside the contract) is exactly what I put into the policy. Given all the demands on my cash flow with having three kids and running a business, I know how fast money can go. I am grateful to have this money saved.
2. It gave me peace of mind. It's comforting to know my kids will inherit something. I've seen fortunes made and lost, clients get laid off and health issues derail a career. It seems things never go as planned. I am grateful that no matter where my financial picture winds up — if I don't save enough or if I use up my other money in retirement — as long as my premium is paid on the whole life insurance, the kids will get something. Mind you, it's not a fortune, but it will help pay for a down payment on a house or their kids' college bills. That's peace of mind.
3. Whole life will help me in the future. The equity in my whole life policy is mine to use at any age for any reason. I've seen clients use their policy as collateral on a business loan, while others use the cash value to supplement their retirement income. Recently, my wife and I bought a whole life policy that will allow us to use the death benefit for future long-term care costs. That again is peace of mind.

How Whole Life Policies Work

If I get asked how whole life policies work, I usually say a part of your annual premium is used to pay for the life insurance and rest is invested by the insurance company. The insurance company can refund a portion of your premium each year in the form of a dividend. Dividends are not guaranteed but can help in the buildup of the cash value. Cash value is the money inside the policy that is yours.

At some point, dividends and the return on your cash value are large enough to pay for future premiums, so you won't have to pay out of pocket anymore. This may take several years, depending upon the performance of the dividend — a higher dividend means the policy will be paid up sooner. As your cash value grows, so will your death benefit. If you borrow money from the policy, this is called a loan. Any unpaid loan is taken off the death benefit at death. There is more to these policies — like the various dividend options — but this is the gist.

What to Look for in a Policy

Once I cover what a whole life policy did for me, my companion in conversation nods his or her head in agreement, sips their cocktail, then says something like, how much should I have or what type? Then I get into how I build policies for my clients. I tell them there are many different types and carriers, but I have some preferences. I prefer buying a whole life policy from a mutual company versus a stock company, because a mutual company isn't subject to the whims of the stock market as much as a non-mutual. Or my preference for a policy with low initial surrender charges so more of my premium can get to work.

Possible Downsides

I tell them to also consider the drawbacks. For instance:

• This is not a short-term product. What I mean by this, is don't expect to get a great return on your money in the early years, it doesn't work like that. These policies take time to build up equity. Also, you wouldn't buy this policy if you needed the money early on because you wouldn't get your money back. Again, this is not a short-term product. You have to be patient.
• There is low initial growth.
• Surrender charges in the first few years will deter you from pulling money out too soon.
• And make sure you can pay the premium: You don't want to get stuck with a bill you can't afford.

I can usually tell if someone bought a policy or if they were sold one based on the size of the premium relative to their income. Someone with modest means should have a modest policy, the premium shouldn't stress them out and be a bear on their cash flow. Anything can happen, like losing a job or seeing a business sour, and if you stop paying the premium early on, usually you won't get all of your money back as there are typically surrender charges early on (depends on the type of policy).

If you can't afford the premium, there are options. You could always request a lower premium, but be aware your death benefit will decrease. If you have enough cash value in the policy, you could see if you can skip the premium payment for that year and borrow from the policy to pay the bill. This will cause a loan, which as mentioned earlier will be taken off the death benefit at death if left unpaid. Some policies have more cash value in the earlier years and lower surrender charges, so called "High Early Cash Value" products. These may help if you have concerns about surrendering a policy early on.

The Bottom Line

All in all, at the end of conversations like this I always feel good about my decision to purchase a whole life policy. My only regret is I didn't buy more when I was younger and it was cheaper. It's not for everyone, but in the right circumstances, at least in my experience, whole life insurance can be a useful financial planning tool.