Who Needs (And Doesn’t Need) Whole Life Insurance?


As Abraham Maslow once said, “If the only tool you have is a hammer, you’ll treat everything as if it were a nail;” even though a hammer isn’t the most appropriate tool for every purpose.

The same can be said for life insurance: it isn’t the most appropriate tool for every purpose (regardless of what life insurance companies and life insurance agents will tell you). The truth is, some people need it and some don’t. 

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This article is going to take an in-depth look at who needs, and doesn’t need, whole life insurance. We’ll also look at what other life insurance products, such as term life insurance and universal life insurance, might be more suitable for some people. Let’s take a look.

Who is Whole Life Insurance Best For?

Over the years, insurance companies have designed a variety of life insurance products to meet the different needs of consumers. Some people only need life insurance for a set period of time (term insurance). Others want a life insurance product with an investment savings component (universal life). Still others people want life insurance that’s going to maintain a level premium for the life of the insured and has a cash accumulation component (whole life).

Now that we’ve established what these various types of life insurance products offer, how do you know which one is best for you? To start with, let’s zero in on whole life insurance.

Whole life insurance is designed for the person that is generally more conservative financially. They want two things: guaranteed level premiums for life, as well as life insurance that offers the ability to accumulate cash at a guaranteed rate of return. 

You’ll notice one important word in both features they want: “guaranteed.” There’s an old axiom that says, “Nothing in life is guaranteed but death and taxes,” which isn’t quite accurate. Whole life insurance does offer legitimate guarantees.

Guaranteed level premiums for life. Many people who buy whole life insurance policies plan on keeping the policy until they die, and they want to make sure that the monthly premium is going to stay the same and is priced to meet their budget now, and their financial status in the future. 

For example, for a 35-year-old non-smoking male, a $100,000 whole life insurance policy could cost $125 per month. That monthly premium of $125 is going to be the same whether they’re age 35 or age 65. They can put it into their monthly budget and “set it and forget it.” 

For convenience, they can set up an automatic bank draft where the premium is deducted from their bank account on the same date each month and paid to the insurance company – no need to write a check each month.

Cash value with a guaranteed rate of return. Whole life is an excellent choice for someone who wants a life insurance policy where some of the monthly premium goes into a savings component. If they want a guaranteed rate of return on their savings for the life of the policy, cash value life insurance meets those requirements.

When you buy a whole life insurance policy, the insurance company will tell you upfront what the annual interest rate is that will be applied to your cash value portion of the policy. It’s a satisfactory benefit for some people, but others have one major problem with this: the interest rate set by the insurance company.

The interest rate for a whole life insurance policy is typically anywhere between 3% and 5%. Yes, it’s not a glamorous rate. But to some people it’s satisfactory, and they’ll accept it because it’s guaranteed. Not everyone is comfortable buying a life insurance policy that has a savings account tied to investments that produce variable, non-guaranteed returns.

If these guarantees appeal to you, whole life insurance is a choice to consider, knowing that there won’t be any surprises for you down the road. Buying a whole life insurance from a top-rated insurance company is a safe bet.

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Who Might Not Benefit From Whole Life Insurance?

The major disadvantage of whole life insurance is the cost. The cost-per-thousand dollars of death benefit is the highest of any type of life insurance policy. Those guarantees come at a fairly steep price. Some people are willing to pay for them, and some aren’t. 

For a young person or couple just starting out, the premiums might be too high for what they can afford to pay for life insurance. Whole life just isn’t a good fit for them right then. But they do have other alternatives if they want to have life insurance protection:

Term life insurance can be an excellent product for younger people. Term insurance can be renewable each year at an increased rate because the insured is a year older, or it can remain level for a set period of years (5, 10, 20, 30). The price is right for many people – the same $100,000 whole life policy that had a premium of about $125 each month would only be about $25 per month for a term life policy for that same 35-year-old.

Whole life insurance also may not be suitable for someone who wants the death benefit that life insurance offers, but they’re looking for a better rate of return on the savings portion of the policy. There are several alternatives available for them.

Universal life insurance offers a death benefit and a savings portion of the policy, just like whole life. There are two major differences between the two:

  1. Universal life has lower monthly premiums.
  2. The savings portion is tied to investments and isn’t guaranteed.

The lower monthly premiums are very appealing to many people. They can purchase a policy with a much higher death benefit than a whole life policy for a lower price.

A potentially higher rate of return on the savings element of a universal life policy can be alluring to people who want greater returns and are willing to take somewhat of a risk. There’s an element of risk because the savings portion is invested and is subject to fluctuations.

Some insurance salespeople will show projections of an 8-10% rate of return, but this isn’t realistic. Additionally, these rates aren’t guaranteed, and you can lose the money you invest. While whole life’s guaranteed rates of return are modest, they are guaranteed.

Some universal life policies will come with a guarantee that you’ll at least have your interest rate guaranteed at 0% to ensure that gains from previous years aren’t adversely affected by a bad year, but in consideration for that they’ll put a cap on your maximum annual gains.

Variable universal life insurance is a third alternative. It’s riskier than standard universal life insurance because your cash value can actually decrease, and the administrative fees of the policy are higher than universal life. Additionally, the investment options come with higher expense ratios than those in similar types of mutual funds.

A major benefit of universal life is you can pay more into the savings component each year when your budget allows for it. This can build the cash value faster, and you can then use that cash value to pay the premiums later down the road, if you’d like. 

The final option to whole life that we’ll explore is not buying life insurance at all. While more people than not have a need to own life insurance, there are many who don’t. 

Not everyone needs life insurance. Those who don't need life insurance are those that have no outstanding debt (no student loans, credit cards, car payments, etc.), no one is dependent on them financially, they’re financially independent, or they don’t own property or a business that would need to be liquidated upon their death (no estate taxes would be due).

For example, a single 25-year old who graduated college with no loans, has stable employment, and some savings in the bank (which could pay for final expenses like burial or cremation), can probably do without buying life insurance at this point in their life.

Similarly, a 55-year-old married person whose children are grown and on their own, and who has a substantial retirement account, may not need to buy a new life insurance policy or keep one they already own. If the policy they own has accumulated cash value over the years, they could surrender it to the insurance company and receive the cash value portion of the policy (they would no longer have the death benefit in force).

Not everyone can afford life insurance. Many people just don’t have any extra money in their bank account each month to pay a life insurance premium. They may be a young couple with a growing family, a single parent, or a recent college graduate looking for work. Life insurance may be something they see as something they need and something they want to have, but the timing isn’t right for them financially. Perhaps, in the future.

Not everyone sees it as a good investment. Some people would rather put their money elsewhere to grow its value. They might be putting money away into mutual funds through their 401(k) plan, they might own stocks in companies they believe in, or they might prefer real estate investing. In addition, the death benefit is something they don’t need.

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Buy Life Insurance For the Right Reasons

When you’re trying to decide if you need life insurance, remember that it’s not meant to be a source of income for you. It’s meant to replace your income if someone is dependent on it or needs it to pay estate taxes to pay off existing debts. If it’s used appropriately, life insurance is a valuable component of your financial life.


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