Why "Whole Life" Insurance is a rip

**Greebo** · 08-13-2008, 11:04 AM

This is taken from yesterday's Dave Ramsey show...

Caller calls in, has been paying on a 100k Whole Life policy for 3 years, at $60/month ($720/yr).

The cash value of this wonderful savings program is now up to a whopping $400. So after 3 years, and $2,160 spent, she's got a savings of a whole 18% of what she paid.

At age 35, she could have gotten a 100k term life policy for about $100/yr (or less!), and the $620/yr could have gone into a money market account, just to match inflation, and would be worth about $1,900. Never mind putting it into a mutual fund...

What a rip - the insurance company basically pocketed $1,700 or so in fees, on such a great investment deal...

**frugalfriend** · 08-13-2008, 11:09 AM

Great example, Greebo! That really puts it out there in black and white. Whole Life = total rip off!

**grneyegrl** · 08-13-2008, 11:32 AM

suzy orman said this years ago.

**Greebo** · 08-13-2008, 11:39 AM

I've no doubt she did - DR has been saying it for years as well. I just thought this was a particularly good illustration of how bad it is, because yesterday's show gave concrete numbers.

**Telephus44** · 08-13-2008, 01:57 PM

I have a whole life insurance policy. I've held it for 8 years and the cash value is about 5% more than what I've paid in premiums. Yes, I could have made more money investing it, but when I was a starving college student it was a bill I had to pay so it kind of forced me to save. I'm going to tap that money to buy me a house :-) I purchased it not so much because I needed it (a starving college student with no husband or kids really doesn't need insurance) but because I wanted to start a long-term investment. And the same way people freeze credit cards in a bag of water so that they won't use them, putting it in a life insurance policy made it very difficult for me to get at so I wasn't tempted to use it.

It depends on what you're using a whole life policy for whether it's good or bad. As actual insurance, it's not the best option (in fact, it's terrible). As an investment, it doesn't have a great rate of return and you need to hold it for a long time to break even.

Funny enough, one of the things my parents did for me was buy a small whole life policy when I was born (nothing outrageous, $3,000 - just enough to cover the hospital bills and a funeral) and I ended up cashing in the policy for $2800 to buy a car when I graduated college and needed one to get a job. In my mind, I considered it kind of like an EF - but since you have to go through considerable hoops to cash it in, you aren't likely to touch it. And it's not going to make you tons in interest.

**janelane** · 08-13-2008, 02:36 PM

I will say I think there could be an exception addendum to the whole life policy question. While I think it is a rip for an adult, I feel, from experience, it's a good idea to purchase small whole policies for babies, not only to cover them through growing up, but as a "just in case" they don't qualify for life insurance as adults.

I have extensive health problems and, much like my attempt to get private health insurance, I've been turned down for every other policy I've tried to get. If it weren't for the small whole life policy my mom started paying into when I was a newborn, I wouldn't have any at all. I've since taken over the policy, and its at least enough to bury me and compensate the hubs if he needs to take off a month or so should something happen to me.

**Mom23boys** · 08-13-2008, 05:17 PM

Thanks for the illustration, Greebo. I have been trying to figure out why whole life insurance is not a good purchase. Now I understand.

What is the best way to purchase a term policy - a 10 year, 20 year, etc.? I am not savy when it comes to life insurance, but know we need it. We only have policies through our employers, but when we discontinue service there then we will not have any. Should we buy now eventhough we have insurance through our employer or wait?

**Greebo** · 08-13-2008, 09:04 PM

Well, "Dave says..." you should have enough life insurance to cover 8-10 years worth of income on each income producer. He recommends 10 or 20 year term insurance, because your financial picture in 10 or 20 years, if you're on a "get debt free and build wealth" program, will be very different.

Personally, I went through Zander insurance (www.zander.com) and put in an app for 10 yr term. For the policy we want right now, we're looking at about $1,200/yr, but that's fairly high because while I'm only 39, I also weighed in at the time at over 280 pounds. Every 25 pounds or so, I'm planning to see about getting the premium lowered.

**Mom23boys** · 08-14-2008, 03:31 PM

Originally Posted by Greebo

Well, "Dave says..." you should have enough life insurance to cover 8-10 years worth of income on each income producer. He recommends 10 or 20 year term insurance, because your financial picture in 10 or 20 years, if you're on a "get debt free and build wealth" program, will be very different.

Personally, I went through Zander insurance (www.zander.com) and put in an app for 10 yr term. For the policy we want right now, we're looking at about $1,200/yr, but that's fairly high because while I'm only 39, I also weighed in at the time at over 280 pounds. Every 25 pounds or so, I'm planning to see about getting the premium lowered.

Thanks for the info, Greebo. I knew you would know the answer!

**quiltingmommy** · 08-14-2008, 03:49 PM

It's funny, we have both types of insurance. A 10k whole life that my in-laws bought for dh. We pay $27/year. We also have a 5k one that the il's bought, it's now worth 8k so I called and asked if we could stop paying the 12/year (yes, a year) for it and just use the extra dividends to pay it...they said yes.

We also have term life ins for dh for quite a bit of money (we took it out back when he made 6 figures) and we pay 88/month. I have term life through work and pay 12/month. (dh didn't pass the health test to get onto mine...his cholestrol was high etc. so we have no choice right now but to keep his other one).

My only concern is that he'll pass away the day after the 25 years are up on the term life and I've spent all that money for nothing! In that instance, I like whole life.

**Greebo** · 08-14-2008, 03:51 PM

quiltingmommy - did you get quotes on whole life, by chance?

**quiltingmommy** · 08-14-2008, 04:00 PM

Are you refering to my insurance through work? No, that is term. I bought 3x my salary and I get another 1x from my company. If I leave the company, I can choose to keep the insurance at a higher rate. DHs is definetly term.

**Greebo** · 08-14-2008, 04:02 PM

No sorry that wasn't clear.

When you got term for DH, did you also get quotes for whole life?

**quiltingmommy** · 08-14-2008, 04:05 PM

You know, I can't remember. It was about 4 years ago when we opened this policy. Do you think it would be cheaper? Maybe I should call the insurance company we have the 10k policy with and see. Actually, I believe we did that a few years back, but were told by a friend in the industry that we should only go with term. (unfortunately, this friend just passed away at 49).

**Greebo** · 08-14-2008, 04:17 PM

No, it would be more expensive. Whole life always is, because of the "investment component".

The thing is, its kind of like car payments. If you paid cash for a cheap car to start with, then banked the car payments you would have had to pay otherwise for the fancy new car, then sold the old car and bought a new car every year with your "car payments", you'd build up to a fully paid for car, and eventually you could even invest enough money from your "car payments" that you'd be able to buy "free" cars every 5 years for the rest of your life out of the returns, with no further payment from your regular budget.

Ditto - whole life vs. term. If the investment plan in whole life is a good deal - why not do one better? Buy term, bank/invest the difference, and - using my example above, if you put $620/yr into an investment plan at 10% (instead of just in savings accounts), the account would be worth $2,052.20 after 3 years instead of the crappy FOUR HUNDRED bucks it was worth after she'd paid $1860 into it.