10 Reasons a Whole Life Insurance Policy Isn’t Worth It

Choosing the right insurance policies is a key way to protect your wealth. But purchasing a whole life insurance policy might be a financial mistake.

Unlike a term life insurance policy, a whole life policy provides coverage for as long as you continue to pay the premiums. That means the coverage can potentially last throughout your life, making it an attractive option for some people.

However, whole life insurance comes with some big drawbacks. If you want to avoid wasting money, make sure you are aware of the following reasons why a whole life insurance policy can lead to regrets.

A whole life insurance policy tends to cost significantly more than a term life insurance policy.

For example, a 40-year-old male policyholder might pay $355 per month for $250,000 worth of coverage, according to Aflac. Term life insurance — which expires after a set period — is usually much cheaper.

Whole life insurance costs more because coverage can last a lifetime, and this type of policy often has a cash-value component. In addition, commissions and fees may apply.

The death benefit you get with a whole life policy is typically smaller than what you would receive if you purchased a term-life policy for the same amount of money.

If you are buying life insurance with the intention of protecting your family after your death, a more affordable term policy with a large payout might work better.

A whole life insurance policy comes with many moving pieces. With so many details, these complex policies can be difficult to figure out.

Unless you take the time to get to know the ins and outs of your policy, you won't know how it works or where your funds are going. Some people prefer the simplicity of a term-life policy.

In the first few years after you purchase a whole life policy, the cash value of the policy will be less than the total of premiums you pay. This period can last more than a decade in some cases.

Even when your policy starts to move beyond the red, there is a good chance you will earn relatively low returns compared to what you could get by investing in the stock market.

When you make premium payments in a whole life policy, a portion of your funds go to the cash value. However, a large part of what you pay for cash value will go toward fees, commissions, and other costs, especially in the beginning.

Unfortunately, that means your cash value account will grow more slowly.

In contrast, you could buy a term policy and invest the difference in the stock market on your own to aim for higher returns.

Many people can earn better returns at lower expense by investing in a low-cost index mutual fund rather than purchasing a whole life insurance policy.

Remember, you don't have to give up on life insurance altogether. Instead, consider purchasing a term life insurance policy and investing the money you save on premiums in an index fund.

One benefit of a whole life insurance policy is that you can borrow from the cash value of the policy. However, the downside of this perk is that loans and withdrawals can get expensive.

First off, a loan or withdrawal will likely decrease the death benefit for your beneficiaries. Additionally, you might face interest charges or smaller dividend payouts.

In some states, the cash value of whole life insurance policies isn't protected from creditors. If the goal of a whole life insurance policy is to protect your family's financial future by shielding assets from loss, this glaring loophole could spell disaster.

The states with weak creditor protection for whole life insurance cash value accounts include:

• California
• Colorado
• Connecticut
• Maine
• Minnesota
• Nebraska
• New Hampshire
• North Dakota
• South Dakota
• Washington
• West Virginia
• Wisconsin

Whole life insurance comes with some tax advantages, but they are often overstated.

For example, many people buy whole life insurance because they want to pass on money to their heirs tax-free. But there are many other ways to do this.

In fact, many assets — including real estate and mutual funds — qualify for what is known as a "step up in basis" when you die. This provision can eliminate tax obligations for your heirs.

Although buying a whole life insurance policy may look like a great way to protect your wealth, these policies can come with serious drawbacks.

Some people may find that purchasing a term life insurance policy makes more sense. If you are unsure about which option is right for you, consider consulting with an independent insurance agent or a financial advisor who can offer guidance.