10 specific reasons why Whole Life is a bust
1) The Swiss Army knife is inefficient.
Whole life policies provide multiple benefits including accumulated cash value and death benefit. They aren't particularly efficient at either. Proper planning to match need and solution with a CERTIFIED FINANCIAL PLANNER® is a more prudent approach.
2) You don't get to have your cake and eat it too.
Properly designing a cash value life insurance policy is a slippery slope. When done right, it can be very effective but it always requires periodic review of performance.
Just remember that your death benefit does not include the cash value of your policy. Depending on your need, having both isn't necessarily a good idea.
Whole life premiums can be 10 times the cost of alternative insurance policies.
The sales process may try to focus on the "investment" portion of the policy, just keep in mind that the actual insurance charges are usually much higher than the going rate.
4) Fee Structure
Whole life policies aren't cheap. One would assume with the regulations regarding financial transparency that the costs would be clearly stated, they're not. You pay your fees in lower returns, especially in the early years.
5) Opaque "Investment" Returns
After setting aside necessary expenses and profit , the insurance company invests the premiums, usually in conservative bond portfolios. If you can invest in conservative bond or other portfolios directly on your own or with an advisor, how will those extra layers of costs/fees benefit you?
6)The progressive benefit of Tax Deferral
The value of a tax free dollar for everyone is not the same; the more you make, the more that deferral is worth (you pay higher income taxes). If you're paying whole life premiums in lieu of other qualified plans that may be available to you, its worth considering running the numbers again.
As for Estate Tax planning, a husband and wife have an exemption of almost $11 million dollars before federal estate taxes kick in. State estate taxes exemptions may or may not be lower. There are other types of policies designed specifically for estate planning issues.
Whole life policies include certain guarantees for death benefits and cash value, the reality is you're most likely overpaying for them.
7)Guaranteed...to cost a lot
While Whole Life contracts do contain some aforementioned (and over priced) guarantees, they're presented based off of non guaranteed projections and assumptions. It's important to understand the ramifications if a policy does not perform to expectations (many don't). This is especially true if policies are designed with expectations of earnings to pay for premiums or term insurance riders.
8) The problem with projections is...that they are projections
Expectations are set that policy cash value are easily accessible through tax-free policy loans. Often left out of the conversation are that loan interest rates can be very high, reduced dividends and crediting rates may apply to loan balances, and accumulated loan interest can lapse a policy.
9)Unfavorable Loan provisions
10) Locking up your cash
From an academic standpoint, investors must be compensated for risk, liquidity, and loss of flexibility. While Whole Life policies are generally coonservative in nature, an owner is not compensated for the liquidity or flexibility (or lack there of)