Whole life insurance is contentious, yet sales of whole life are growing. So, why are people buying it? In this blog I’ll analyze three reasons why someone would purchase a whole life insurance policy.
Three reasons to buy whole life insurance
You have a goal to leave a legacy.
If you want to leave money to the next generation, a whole life policy is an efficient way to do so. Unlike term, whole life insurance is designed to last for your entire lifetime. Setting up your policy correctly and paying the premiums guarantees you’ll have that death benefit when you pass away.
Can’t your legacy goal also be funded by your investment portfolio? Yes, but during retirement your personal income will likely be funded by your investment portfolio. There are no guarantees in investing, and poor market returns can erode your legacy goal.
This is why whole life insurance is an efficient way to accomplish a legacy objective. If you only have an investment portfolio, you will be forced to curtail your spending in retirement to support your legacy. This overly-conservative spending approach can be improved upon by having the permanent death benefit of a whole life policy.
You want a better retirement income strategy.
Just as a legacy goal is better accomplished by a whole life policy and not just an investment portfolio, the same goes for retirement income. An investments-only retirement income approach can work, but you will be dependent on the markets to provide positive returns.
Specifically, having a whole life policy in retirement gives you the confidence to purchase an income annuity. An income annuity is an exchange with a life insurance company. You give up a portion of your retirement assets in exchange for a guaranteed monthly check from the insurance company.
Annuities provide high income rates and can give you an overall higher retirement income. But the annuity income stops at the death of the owner. If you were to die prematurely, this wouldn’t be a good deal (especially if you are married).
That’s why having a whole life policy makes it all work more efficiently. The death benefit from the whole life policy provides the funds needed for the surviving spouse if the annuity owner dies prematurely. While you don’t need a whole life policy to buy an annuity, it gives you the confidence to do so because of the death benefit.
You want to use the cash value.
Whole life not only provides a death benefit, it also provides cash value that can be accessed tax-free through withdrawals and loans. The cash value can be accessed for any reason, but let’s examine it in the context of retirement income.
In this blog, we wrote about the sequence of returns risk in retirement and how reverse mortgages can help address it. The cash value in whole life insurance can also be used to combat a poor sequence of returns.
A quick refresher—sequence of returns risk refers to the unknown order of your investment returns. Market volatility during the first few years of retirement can have an outsized effect on your investment portfolio. This is because you are likely withdrawing your retirement income while the market is turbulent. Even if (when) the market recovers, these withdrawals during down markets can shave years off your portfolio’s income potential.
If you have an asset that is not correlated to the stock market (like the cash value in whole life), you can use this for your retirement income in years when the market has a negative return. As you can see in the Reverse Mortgage blog, a coordinated withdrawal strategy vastly increases your investment portfolio value. While it’s a different asset (cash value instead of a reverse mortgage), the concept is the same.
What about “buy term and invest the difference”?
Since whole life premiums are more expensive than term insurance, some people recommend buying the cheapest insurance possible and investing the difference. But as you can see, buying a whole life insurance policy improves legacy and retirement goals, even with the added cost of premiums.
Curious about what this looks like for you? Schedule a time with one of our agents today!
