This Is What’s Wrong With How Whole Life Insurance Is Sold

Insurance, Life Insurance
whats wrong with whole life insurance

San Diego life insurance agent Chris Huntley has heard one story after another from people who were talked into pricey whole life insurance policies they couldn’t afford. What many of them really needed, he says, was inexpensive term life insurance.

The anecdotes make him cringe. Whole life insurance has its place, he says. “What I’m not OK with is how whole life is sold.”

Now Huntley is asking personal finance bloggers, insurance agents and consumers to join him in a “whole life insurance rebellion,” an effort to educate consumers about life insurance and the risks of buying the wrong product. His website serves as the hub for the push.

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Comparing the policies

Huntley’s rebellion is the latest salvo in a decades-long battle between proponents of whole life and term life insurance. Here’s how the two compare:

Whole life insuranceTerm life insurance

  • Permanent: It covers you for your entire life, no matter when you die.

  • Includes a cash value account: You can borrow money against the cash value or surrender the policy for cash. The value grows slowly over time tax-deferred, and the minimum rate of return is guaranteed.

  • Expensive: Annual price can be as much as 10 times a 20-year term life policy.
  •  
  • Temporary: You choose the term, such as five, 10, 20 or 30 years, and the policy pays out if you die within the term. If you outlive the term, the policy pays nothing.

  • No cash value: You cannot borrow money against the policy or surrender it for cash.

  • Inexpensive: The annual price of a 20-year term life policy is a fraction of what you’d pay for the same amount of whole life.
  • Whole life insurance is an unsexy product that sparks a lot of sharp debate. In recent years, personal finance celebrities Dave Ramsey and Suze Orman have trashed whole life and other permanent life policies that are sold as “investments.” Ramsey dubbed it “one of the worst financial products available.”

    Long-standing debate

    “I’ve been in the business for 50 years, and that criticism was there when I started,” says Marvin Feldman, president and CEO of insurance industry group Life Happens. “It was there when my father started in 1938.”

    James Hunt, a life insurance actuary with the Consumer Federation of America and a former Vermont insurance commissioner, recalls how Primerica, whose life insurance business focuses solely on term life, referred to permanent life insurance as “trash value life insurance” in the 1980s. Those on the other side of the debate referred disparagingly to agents who promoted only term life as “termites,” a word that would then be embraced by some pro-term agents.

    Huntley’s firm, Huntley Wealth & Insurance Services, sells mostly term life and some whole life. The whole life policies he sells are often for smaller amounts to cover final expenses. He says he’s not against whole life as a product. His beef is with agents who pitch whole life as an investment to consumers who have modest incomes.

    Agents earn larger commissions on whole life than term life. “Just because someone can make good money selling something doesn’t mean it’s a bad product,” Huntley says. But he adds that there is a lot of pressure on agents from some companies to sell whole life insurance.

    If you can’t make a payment on a life insurance policy, the coverage ends. And if that happens in the early years of owning a whole life insurance policy, you walk away with little or no cash value. The thousands of dollars you’ve spent on the policy are gone. This is what happens to consumers who get talked into a whole life policy they can’t afford, Huntley says. They end up without life insurance coverage and with nothing to show for their “investment.”

    More than a quarter of whole life policies are terminated in the first three years, according to the latest available data from the Society of Actuaries and LIMRA, a financial services research organization.

    Huntley’s “whole life insurance rebellion” asks participants to do three things:

    • Educate themselves about life insurance.
    • Share information about the rebellion on social media.
    • Sign the Insurance Bill of Rights, a petition created by Tony Steuer from InsuranceLiteracy.org. Among other things, the bill says agents should act in consumers’ best interest and recommend affordable and appropriate coverage.

    When whole life might make sense

    Before even thinking about investing in whole life, Huntley says, consumers should max out contributions to tax-advantaged retirement accounts. Meanwhile, they can buy cheap term life to get the life insurance coverage they need.

    Feldman says term life is a good choice for people who have a temporary need for life insurance, such as providing money for their family to pay debts or living expenses for a limited number of years in case they die.

    “This is not a subject where there’s a hard-and-fast rule where you should only buy this or buy that,” he says. “The answer isn’t either-or; it’s a ‘depends’ or ‘maybe.’”

    He adds that whole life is a good solution for people who need lifelong coverage and want the safety and guarantees that the product provides. He’s had clients who managed to keep businesses afloat because they could borrow against the cash value in their permanent life policies.

    Whole life can make financial sense as an investment alternative for people with money to burn. These are folks who have maxed out contributions to tax-advantaged retirement accounts and want a safe, conservative vehicle for extra cash to diversify a portfolio. The cash value growth in a life insurance policy is tax-deferred. To build up enough cash value to make it worthwhile, though, the policy needs to be held for at least 20 years, Hunt says.

    Huntley says his main goal for the rebellion is for consumers to be better educated about life insurance. Although he expects to get some opposition from others in the industry, he says he launched the effort because, “I just feel like it’s the right thing to do.”

    Barbara Marquand is a staff writer at NerdWallet, a personal finance website. Email: bmarquand@nerdwallet.com. Twitter: @barbaramarquand.

    This article was written by NerdWallet and was originally published by Forbes.