Whole life insurance – are they really that bad?

If you are like me where your parents have bought some insurance policies on your behalf when you were kid and you have no idea what they are, it’s time to go find out because it’s time to take charge of those policies now!

Personally, my parents have bought me 3 policies – an integrated shield plan, a whole life insurance policy (started 10 years ago) and a life-time endowment policy (started when I was age 3). I’m happy about my integrated shield plan, but for the other two, I wasn’t too sure. For this post, I’ll just touch on the whole life insurance policy that I have.

Whole Life Insurance Policy

You see, my heart sank when I saw this policy document. Because everyone online is bashing whole life insurance policies. “Get term life insurance!”, they said. And I agree with them, especially when you are comparing the premiums. My parents have paid an annual premium of $1290 for a basic $100K coverage, where a term life insurance of the same coverage would now cost me $83 annually for 20 years. That’s a difference of nearly $24K in just 20 years!

But what should I (and maybe you) do when I have a whole life insurance policy bought by my parents and it’s been ongoing for many years? My parents insist that I do notĀ surrender this policy, so in order to keep them happy, I shall not. But is whole life insurance as bad as people say?

Let’s take a look at the numbers that goes with my policy (projection based on 5.25% investment return).

Screen Shot 2016-07-03 at 2.15.01 pm

According to the policy document, I should only break even in 2018. However, according the annual letters the insurance company have sent to announce the bonus, my policy is already past par this year (total premium paid: $14,152, total cash value: $14,290), that’s 2 years in advance. Mind you, I have yet to start paying for this policy yet and it’s already past par. It’s not that bad keeping it right?

Given that I’m not allowed to surrender this policy, I’m just going to keep it and cash out in the later years (age 55/60/65) and use the cash value as my retirement funds. By then I would no longer have dependents so I would surrender the policy upon cashing out. Or if I am in my 40s and pretty sure I will not have any dependents, I might surrender the policy and withdraw the cash value if I’m in need of the money.

Sure, if I take a similar term life insurance, I would pay an annual premium of $113 till age 65, which would add up to $4633. So by age 65, I would have paid $$62,265 more in premiums with this whole life insurance. But at the same time, I might get back cash value of $226,990. That is an opportunity cost that I have to accept.

I can totally see why my parents chose to buy a whole life insurance policy – firstly out of love and also because they are extremely conservative investors who are risk adverse (that’s where my genes come from). So going for something like this rather than say, picking stocks or getting an ILP would definitely make more sense from their perspective. They themselves have multiple endowment plans of zero to low risk and I have seen how those have worked for them to achieve their financial goals.

Like I said, there’s really no right or wrong when it comes to such things. What would you have done differently if you were in my shoes?

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