Don’t fool yourself and buy the wrong type of insurance coverage.
- Whole life insurance is an alternative to term life insurance.
- Whole life insurance policies can be very expensive.
- Many people buy whole life insurance for the wrong reasons, including thinking it’s a good investment.
Purchasing life insurance is a smart financial decision for people with dependents. Indeed, the coverage could save loved ones from financial disaster in the event of an untimely death.
Although it is a good idea to purchase life insurance, the type politics matters a lot. Specifically, while buying term life insurance can provide affordable and essential protection, buying a whole life policy is often a poor choice due to unnecessarily high premiums that end up being a big waste of money.
Unfortunately, many people buy whole life insurance for the wrong reasons. To make sure that doesn’t happen, consider these four really bad reasons to buy this type of coverage.
1. Due to a misunderstanding of insurance needs
Sometimes people buy whole life insurance because they don’t really understand the real purpose of life insurance coverage and don’t think carefully about their needs.
Life insurance coverage should replace income or services that a policyholder provides while people depend on that policyholder. For example, suppose a policyholder has a wife with a joint mortgage and two children who will need to be educated.
The death benefit from the policy could replace the income he brought into the house the wife depended on since their life was based on being a two-earner household. The death benefit could also pay off the family mortgage and cover the children’s education.
Eventually, however, the policyholder would stop working and begin to depend on retirement funds. The mortgage would be paid off, and the kids would be grown up and going to college. At this point, no further life insurance coverage would be needed.
If the policyholder had purchased a term life insurance policy, the term of coverage may end once these steps are completed. But if whole life cover was purchased, it would provide unnecessary protection at this point – and at substantial cost.
2. Because the costs have not been compared
Another bad reason to buy whole life coverage is that consumers don’t know how much more expensive that coverage can be. Whole life insurance premiums can typically cost between five and 15 times more than premiums for a term life insurance policy. There’s very little reason to spend so much, except in rare cases where coverage is truly needed for life.
Consumers who don’t get multiple quotes and compare insurance options may not realize the large difference in price, which could lead them to pay a much higher premium for no reason.
3. Due to a mistaken belief, it’s a good investment
Some people buy whole life insurance because it has an investment component. Consumers may think it’s a good idea to get a policy they can cash in or borrow to help fund their retirement.
Unfortunately, whole life insurance comes with many fees and restrictions that often make it a poor investment choice over a standard retirement account or even a taxable brokerage account. In almost all circumstances, consumers would be much better off choosing other investment products and using the extra money that a whole life insurance policy would cost to buy those other assets.
4. Because unscrupulous advisers are pushing these policies
Finally, the worst reason to buy a whole life insurance policy is that advisors pressure consumers to do so. Sometimes this happens because whole life policies can pay a much higher commission. Advisors who are not acting in the best interests of their clients may suggest whole life insurance to get rich.
To avoid buying the wrong coverage, consumers should ensure that they are informed about the insurance policies available and should compare all of their options before setting up a life insurance policy to protect their loved ones.