Why Do Financial Advisors Steer People Away From Whole Life Insurance?
If you’ve asked a financial advisor about whole life insurance, chances are you’ve been met with a wary response.
There are a few reasons for this:
Whole life insurance isn’t suitable for everyone. It can be 6 to 10 times more expensive than term life, and you need to maintain your premium payments for a lifetime to prevent your policy from lapsing.
It’s a slow-to-grow investment. Financial advisors often meet with people who are interested in high-risk, high-return investments, and whole life simply isn’t that. It’s steady and predictable, with guaranteed annual returns set by the insurer — you can expect cash value growth around 2% to 4%. For these reasons, whole life is better seen as a supplement to a robust investing strategy. It can help to round out your returns and build a nest egg for you to cash in at retirement.
The insurer manages the investment, not you or your advisor. With whole life insurance, the insurer manages the way the cash value is invested. It’s hands-off, and many policyholders like the “set it and forget it” approach as they are likely participating more closely in their other investments. This sets whole life apart from other types of permanent life insurance, such as variable life, which allows you to choose your investments from a portfolio presented to you by the insurer. There’s higher potential for growth, but it comes with a higher risk level. From a financial advisor’s perspective, they would like to have a say in terms of investments — which is another reason why many try to steer people away from whole life insurance.
As you can see, whole life insurance limits a financial advisor’s control, and they’re right that whole life isn’t for everyone. At Steven McMahon Insurance, we recommend you purchase a low-cost term life insurance policy first before exploring permanent policies.
Now, let’s look at the best candidates for whole life insurance.
Investors who want to add a less risky option to their portfolio. Diversification is the aim of the game, especially in today’s macro environment. The returns of whole life insurance are independent of market conditions, so it’s a good, safe investment to add to your portfolio.
High net worth individuals who have maxed out retirement accounts. Once you’ve made all the allowable contributions to tax-advantaged accounts like a 401(k), turn to whole life insurance. The policy will help you build up tax-deferred savings within the cash value account, and you may even earn dividends if you’re with a mutual life insurance company. You can leave the policy alone to grow, and when you no longer need life insurance years or decades from now, you can surrender the policy for cash. You may be subject to some income tax purely on the gains.
Wealthy individuals whose families might have to pay estate taxes. The IRS charges an estate tax on any assets above the federal tax exemption limit, which is $12.92 million in 2023. This means if your estate is worth more than this number, your heirs will have to pay estate taxes, and often pretty soon after you die. In addition, some states charge an estate or inheritance tax, though the threshold is usually lower. Whole life insurance can help you pass on the money to your heirs to pay estate taxes without forcing them to spend or liquidate other assets.
For these people, whole life is an excellent addition to a financial or retirement plan. If you’d like to learn more, please contact the team today.