The Internet is full of scathingly negative tirades on the alleged worthlessness of whole life insurance. And yet, some of the most financially and tax savvy investors in the country hold this very variety of life insurance policy.
Why the discrepancy? Is there, perhaps, a bit of truth on both sides of the fence in the ongoing dispute between proponents of term and whole life insurance?
Upon close examination, we believe you will find that whole life insurance has many distinct advantages, particularly in the realm of tax benefits. Some of its disadvantages make it unsuited for many, but its benefits make whole life truly attraction to some.
Here are the major tax pro and cons of whole life policies:
While term life policies offer straightforward coverage at cheaper rates, whole life is more multifaceted and offers strategic tax benefits to those who can afford it. The major pros to be had include:
- Whole life policies accumulate a cash value as you pay on the premiums, besides keeping you covered should you pass away. And taxes are deferred on any profits made through the policy, making it a veritable tax shelter.
- You can borrow from the cash value of your whole life insurance policy or use it as collateral on a loan. You do not have to pay taxes on the money used when making these financial moves, and there is no time limit on when you must repay cash borrowed back out of your policy.
- Depending on how your policy is set up, interest or dividends can be earned through whole life insurance. Any interest earned is tax-deferred.
- For wealthy investors who have reached the tax shelter limits of their 401Ks, IRAs, and other retirement plans, whole life is a limitless tax shelter they can continue to invest in.
- By depositing large sums in your whole life policy and by utilizing the great flexibility these plans offer, it is possible to get around painful estate tax problems.
The positive side of whole life is often overlooked by many of its critics, and we have attempted to correct that oversight above. But it is true that whole life insurance has a few drawbacks to take into account:
- The premiums are much higher than with term life, and 40% of whole life policy holders fail to keep up with payments and have their policy terminated within the first 10 years. Thus, whole life is most suited to those with long-term stable income.
- Premiums are averaged out and kept even with whole life, which might seem like a pro. But this does mean higher than normal rates at the outset of a policy, though it avoids price spikes when you get older. Whole life is a long-range investment. It’s only worth it if you carry the insurance for decades.
- There is an investment uncertainty involved in whole life. You can’t be sure how much interest you will earn and keep sheltered from taxation until after the fact. But this is true of many other investments as well, of course.
In the final analysis, we should conclude that term life is best for those looking for the cheapest way to insure a beneficiary during the specified term. But, if you want to get additional benefits out of your policy, including tax shelters and enhanced borrowing ability, you will have to opt for a whole life plan.