Common Myths Regarding Whole Life Insurance
Even though whole life insurance is truly one of the most conservative and well-established insurance products offered by most insurance companies, there are still quite a few common misunderstandings regarding this type of life insurance. The most common myths prevailing about a whole life insurance policy are:
- It is too expensive
- Whole life insurance is more expensive than universal life insurance
- The purchase of whole life insurance is not a good way to save money
- Cash value is merely the savings component of whole life insurance
- All whole life insurance policies are the same
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Myth: Whole life insurance is too expensive.
Reality: It is expensive over the short term. Over the long term, it becomes profitable. In fact, it can generate an income stream and be used as a supplemental retirement plan.
Myth: Whole Life Insurance is more expensive than Universal Life Insurance.
Reality: The planned premium for a universal life insurance policy is typically about half of a whole life insurance policy. However, the cash value of a universal life insurance policy typically goes to zero (on a guaranteed basis) within the first 5-20 years. To guarantee an endowment (like whole life insurance offers) a universal life insurance policy would require a slightly larger premium than a whole life insurance policy. This is because universal life has slightly higher internal expenses.
Due to the fact that universal life insurance has higher internal expenses, it is accurate to say that the cost of insurance of universal life is somewhat higher than whole life insurance.
Myth: Whole life insurance is not a good way to save money.
Reality: It is a very good money saving strategy when measured against other assets in its’ class.
This is one of the biggest objections and is where a key error in logic is made.
To say that whole life insurance is not a good way to save money often implies that one could do better by saving money in stocks or stock mutual funds. But comparing whole life insurance to these types of financial instruments is as inappropriate as comparing money markets or CDs to stocks. Is a money market a bad way to save money? Is taking less risk in exchange for a lower return a bad money-saving strategy?
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The answer is very often that there is a place for both growth-type assets and safety of principal-type assets. Most individuals want some of their assets held permanently in a more stable place like a money market and some of their assets more at risk in stocks or stock mutual funds.
The return in stocks or stock mutual funds may be greater than in money markets or whole life insurance, but the risk of loss of principal is much greater in stocks or stock mutual funds. It is far more accurate to compare the returns of whole life insurance to money markets. While there are differences between the two, the safety of principal is a key feature of whole life insurance and money markets. A money market or a whole life policy’s cash value will not lose any value if the stock market (or the bond market, for that matter) falls dramatically.
If one accepts the reality that there are different classes of assets (e.g. safety of principal, growth, income, etc.) and that it very often makes sense to hold some assets in more than one class, then the real question of whether or not it is a good money-saving strategy must be answered by a comparison of other assets in its’ class.
In other words, comparing whole life insurance to other safety of principal assets demonstrates that whole life insurance, as a long-term accumulation vehicle, is extremely competitive and a very good way to save money.
Myth: Cash value is merely the savings component of a whole life insurance policy.
Reality: Cash value is integral to the performance and guarantees of a whole life insurance policy. We offer a complete explanation of the cash value’s role in whole life insurance.
Myth: All whole life insurance policies are the same.
Reality: Most whole life insurance policies offer the same guarantees, however, the performance of whole life insurance policies issued by some insurance companies has historically been dramatically better than whole life issued by other companies. For example, cash value accumulations (and death benefit increases) occur much more rapidly in some companies’ policies, even after adjusting for any differences in premiums. This is generally due to better performance related to dividends.
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