Whole life insurance is a form of life insurance that extends throughout the duration of a person's life, meaning once a policy is purchased, it will pay out to your beneficiaries. A whole life insurance policy also features a savings component, meaning the policy accumulates cash value and earns interest over time. While the policy will provide for your beneficiaries, it is not without its drawbacks.
Cost
A whole life insurance policy can be five to 10 times more expensive than term life insurance, which does not feature a savings component. Moreover, this monthly component is a commitment a person makes for the rest of his life in order to receive the policy benefit for his beneficiaries, meaning the payment could be difficult should a person experience financial hardships.
Returns
In terms of investment vehicles, a whole life insurance policy offers very little in the way of returns. It typically takes at least 10 years for the policy to gain cash value, whereas a person could invest in another form, such as stocks, mutual funds or bonds, and see a more immediate return on investment and accumulated growth over time.
Hidden Fees
One of the chief reasons life insurance policies take so long to accumulate value is the number of hidden fees associated with the cost. For example, most of the first year's premiums go toward paying an insurance agent's commission. While an agent's expertise often is required for choosing the amount and terms of a life insurance policy, this is often repaid in significant costs to the policyholder.
Necessity
Life insurance is typically used for those who have families or people who are dependent upon the policyholder for a significant portion of income. When a person gets older and has grown children, he may not require enough life insurance to pay for a college fund because his children have already gone to college. In this instance, a person may only require enough in savings to cover funeral costs, not a five- or six-figure life insurance policy.
Tax Breaks
While whole life insurance policies offer tax-deferred benefits on earnings, the tax benefits typically do not equal those of other investments, such as a 401(k) or individual retirement account, which offer more significant tax breaks, allowing a person to have more money to spend.
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