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Why Buy Whole Life?

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Why Would Anyone Buy Whole Life?

Still not convinced

I'm sure the title alone will raise some feathers with life insurance agents but it's a legitimate question and I still haven't heard a convincing answer.  In fact, if anyone can successfully answer the above question, I will list their answer below but I'm not expecting additions anytime soon.  In light of the cost for term life insurance and more importantly, the purpose of insurance in general, it's hard to argue for whole life.  Let's take a quick look at the usual explanations and why they don't wash.  We'll then look at the only reason I can come up with and again, I look forward to any clarification of my somewhat pessimistic basis for why whole life insurance is sold at all.

A real quick intro to whole life versus term life insurance is in order.  With term life, you buy protection for a fixed period of time (usually 5 - 30 increments) at a much lower premium or cost to have that protection.  If you pass away during that time, the policy pays out (with the usual limitations).  With whole life insurance, you are purchasing life insurance which is guaranteed to pay out.  There is no term limit as long as you pay the premium as required.  The cost for this insurance is much more than term life...usually about 10 times more expensive.  Now think of life insurance is really there for...to cover a risk of lost income due to the passing of a loved one.  Let's go through some of the "selling" points of whole life insurance.

The first is that you'll build cash value in the policy.  Yes...you will build cash value WITH THE EXTRA CASH YOU"RE PAYING.  Actually, you'll get less "value" than the extra cash because the carrier has a profit (not to mention the broker). 

Next, they sales pitch focuses on an inherent flaw in people's intuition and/or preferences which touches on the role of insurance in the first place.  What they're really selling with whole life is you'll get "something".  The problem with insurance (life, health, property and casualty) is that people want to receive something now for money they're paying now.  The concept of protection against a potential risk doesn't ring right with most people.  Whole life is capitalizing on the quirk in our world view.  It reminds me of dental insurance.  We deal with health insurance for groups and individuals as well.  Employees will glaze over (unless they have health issues) when we discuss the health benefits but become real animated about dental insurance.  Dental insurance is really a commodity and it's paying a pittance versus the cost but people USE IT.  They use it a few times a year.  They perceive value but if they're healthy, the health insurance just looks like a cost.  That's the same issue with term life and whole life.  The life insurance company is getting you to pay much more to address this misperception we all hold deep inside about paying something for nothing.   Don't be fooled.

This explains why the life insurance companies and life insurance agents sell whole life.  They both make a lot of money in doing so and they can point to the buyer's satisfaction with the product (based on the nonsensical need described above).  The only real reason I can see to buy whole life insurance is an illegal one.  Basically as a vehicle to shelter income as a paid benefit for self-employed and corporate officers to take the cash value out of the policy.  Again, that's illegal and the IRS will find you.  Otherwise, why would anyone buy whole life over term life insurance?  We're listening... 



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