Whole Life Insurance is a total Rip Off, unless…

Written by: Steven Gibbs | Last Updated on: May 23, 2024
Fact Checked by Jason Herring and Barry Brooksby (licensed insurance experts)

Insurance and Estates, a strategic life insurance provider composed of life insurance professionals, is committed to integrity in our editorial standards and transparency in how we receive compensation from our insurance partners.

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In a world where price is often “king”, it’s easy to understand why Whole Life Insurance is often viewed as a total “rip off” or even a “scam”. After all, when comparing whole life insurance vs term life, whole life can cost anywhere from 5 to 10 times more than a term life policy with the same initial death benefit.

And for most folks just looking to purchase a life insurance policy to…

“Simply protect their loved ones in the event of their death”

Paying up to 10 times more on their whole life insurance rates vs purchasing an initially much less expensive term insurance policy seems like a really bad “investment”.

Which is why we here at I&E wanted to take a moment and discuss exactly why…

“Whole life insurance cost so much?”

Or phrased another way…

“Why is term life insurance so INEXPENSIVE?”

After all, there must be a reason… Right?

Well… The truth is, there are several reasons why there is such a huge price difference between purchasing a whole life insurance policy vs a term life insurance policy with the biggest reason being…

If you end up purchasing a term life insurance policy….

You’re chances of actually dying while actually owning the policy or while the policy is “in force” is actually very small.

Which is a good thing because it means that you’ll “probably” won’t die during the time period your insurance policy was purchased for.

And any time you “don’t die” has to be viewed as a positive…  Right?

You see…

While both term insurance and whole life policies offer a death benefit, in the case of a term insurance policy, that “death benefit” isn’t guaranteed. This is because with term life,  the “death benefit” is only paid out in the event that you die during the “term” period of the policy. Which means that if you purchase a term life insurance policy, there is a really good chance that you’ll end up out living the policy, otherwise why would an insurance company choose to offer you coverage for so cheap?

After all, the life insurance companies are not charities, they’re business is designed to make money, by taking “acceptable risks” with who they will and won’t insure. In fact, while its next to impossible to get any kind of definitive estimates on what percentage of term life policies actually pay a death benefit, most “insurance experts” seem to agree that its somewhere between 1 to 3 percent of all term policies will actually pay out.

Now, we’re not suggesting that an insurance company doesn’t choose to pay out in the event of an insured’s death, were only suggesting that life insurance companies are really good at what they do, which is probably why they are so profitable!

This is also why term life insurance is really cheap initially compared to whole life insurance because if its true that less than 3% of term policy holders will ever collect, that leaves a lot of folks paying for insurance that will never pay out.

So, is this a bad thing?  Is term life insurance a scam?

No, not really, because after all, the insurance company did live up to their side of the bargain in that they provided coverage for a very affordable price during a set period of time. It just so happens that in doing so, they’re able to profit handsomely for providing this valuable service.

Is whole life insurance a scam?

No, it is not a scam. You see, when an individual decides to purchase a whole life insurance policy, the insurance company realizes that they will one day be on the “hook” for the agreed death benefit amount assuming the insured keeps paying their premiums which is one of the main reasons why these policies cost much more than term life.

Now the good news is those willing to pay the extra bucks to ensure that their family will receive the agreed upon death benefit by purchasing a whole life insurance policy, there are a few “added benefits” that could make one seriously consider purchasing a whole life insurance policy.

Which brings us to the point in this article were we like to point out five reasons why purchasing a whole life insurance policy “might” not be a total rip off for you.

Top 5 Reasons Why Whole Life Insurance Isn’t a Rip off!

  1. When I say “Whole Life” you say “Savings Account!”

One reason why we here at I&E will often recommend folks purchase a whole life insurance policy or a “high cash value whole life insurance policy” is so that than can have a safe place to “park” their money, other than a super low savings account at their local bank.

To acknowledge that this particular reason goes against the “conventional wisdom” of many financial advisors out there who will tell you that whole life insurance policies are terrible investment tools, but we’re not suggesting that you use whole life insurance as an investment we’re simply suggesting that you use it as a “savings account”. And the benefit of having a guaranteed rate of return on your cash value is a huge benefit when so much of our life is uncertain.

Traditional Bank Savings AccountHigh Cash Value Whole Life Insurance Policy
Earnings RateThe national average yield for savings accounts is 0.58 percent APY as of Dec. 18, 2023 (*Bankrate, December 13, 2023).
But actual earnings are less after tax and not guaranteed.
Guaranteed (average) 3% interest. Plus an additional 2%-4% dividends. Tax-free, so net earnings of 5%-7%, which may increase as interest rates increase.
Withdrawals and EarningsAmount available for withdrawals is lower because gains in the account are taxable.Full amount of cash value is available for withdrawals.
LoansDoes not offer loans.
Loan would have to be obtained through a bank or other lender.
Loans are available via the cash value, with no approval needed. Plus, the amount borrowed still continues to generate interest and dividends.
Loan RepaymentAmount and due date of repayments is determined by the bank or lender. If payments are late or missed, it negatively impacts your credit score.No required loan payments. Policyholder determines when and how much is paid - or even IF payments are made.
Added Benefits Upon DeathPaid on Death (POD) to a beneficiary.Death benefit is paid to beneficiary income tax free.
Living BenefitsNone~Chronic Illness Rider - With a chronic illness diagnosis or need for long-term care, funds may be accessed from the death benefit.
~Accelerated Death Benefit - Death benefit funds may also be accessed in the event of a terminal illness diagnosis.
~Protection from 3rd party creditors - In most states, whole life insurance is protected from creditors, lawsuits, and bankruptcy.
CostsNonePremium is required for death benefit. However, premium payments are leveraged for a larger death benefit payout - which is received income tax free by the beneficiary(ies).
  1. Change your “role” in the banking world.

Another reason why we’ll often suggest purchasing a whole life insurance policy might be a good idea for someone is when we encounter a client who has savings combined with debt. These folks are in a unique situation where should they decide to change their way of thinking might be able to utilize a financial strategy called “infinite banking”.

Infinite banking

Infinite banking  is a term that was coined by Nelson Nash who discovered that he could use his own whole life policy to accomplish many of his own financial goals.  One of which was to ultimately “become his own banker”.

You see, by owning a whole life insurance policy that has accrued “cash value”, the owner of such a policy can begin to borrow against his or her own cash value to make large purchases such as a car, a home, ETC.

Only now, instead of paying for these expenditures by taking out a loan and paying interest, the policy holder is able to use their cash value in their own policy to pay for these items and then simply pay themselves back with interest!  Thereby eliminating the role of the bank or banker.

This is why we here at I&E love recommending these “types” of infinite banking policies to younger folks who can build up their “cash value” over time, as well as to older folks who have the means to “pre-pay” their cash value whole life insurance policies using a paid up additions rider so that they can immediately take advantage of these opportunities.

Still not “sold” on this advantage?

No problem, all we would suggest for you to do is try and determine just how much you pay other institutions for the “right” to use their money each year.  Then take that dollar amount and multiply it by the number of years you plan on continuing to use creditors to finance your way of life. If you do so, we believe that you’ll begin to see how much you’ll end up paying these other institutions over the years and decades and understand the compound saving power of becoming your own banker.

  1. Gimme Shelter

No, we’re not talking about the classic Rolling Stones song here, what we’re talking about in reason number 3 for why you may want to purchase a cash value whole life insurance policy is that these types of life insurance policies provide excellent tax shelters for your money.

You see, within a cash value whole life insurance policy, the cash value accumulation doesn’t get reported to the IRS, as a result, this cash value doesn’t need to be included on your asset reports.

Student Loans FAFSA

You’re currently a student or you’re helping a student finance his or her education, this also means that this money won’t appear on one’s Free Application for Federal Student Aid or FAFSA application.

Social Security

Additionally, cash value life insurance allows you to take out money through withdrawals or loans and not have it count against this social security tax.

Creditor Protection

Is also totally protected from creditors in many states and partially protected in others.  Which for some is all the reason they need to want to purchase a whole life insurance policy.

  1. I’m approved!

Once your cash value whole life insurance policy has accumulated cash, you don’t need to worry about loan approvals.

In fact, borrowing against your life insurance policy’s cash value doesn’t even appear on your credit report because in essence all you’ve done is “borrowed” money from yourself!

Now if you combine this reason with the fact that the accumulated cash within a participating life insurance policy is protected from creditors in many states, it’s not hard to see why so many folks who owned these “types” of policies were quite happy with their decisions to purchase them during the last housing crisis!

  1. Make your money go to work!

The beauty of whole life insurance policy is that it allows your dollars to perform many different functions. Functions such as

  • paying your premium,
  • accumulating cash value,
  • create a waiver of premium rider,
  • increasing your death benefit,
  • leveraging your cash value through loans
  • etc

Plus, while banks, businesses, and government sectors were closing their doors, one sector of the economy stood strong and steady, unaffected by these horrible circumstances… Life insurance companies.

So, you see, while it is true that these “types” of life insurance policies do tend to cost quite a bit more than a term life insurance policy, when you factor in the fact all of the ways that they can be used towards your benefit, one can easily begin to make the argument that there actually quite affordable.

The trick is…

You have to be able to find a life insurance agent who fully understands these “types” of life insurance policies and is willing to take the time and explain how they may benefit you and your family.

But don’t fret…

Because here at I&E, this is exactly what we do.  You see, we’re not here to tell you what “type” of life insurance that we think is going to be the “best” for you.  Instead, we want to hear about what your needs are so that we can present to you several options which we feel might meet your needs.

The good news is…

That because we work with some many companies which offer a variety of different products, there’s a really good chance that we’re not only going to be able to find a great solution for you, we’re going to find it for you at a premium you can afford!

So, what are you waiting for?  Give us a call today and see what we can do for you!

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    You write: “when an individual decides to purchase a whole life insurance policy, the insurance company realizes that they will one day be on the “hook” for the agreed death benefit…” WRONG, (as you probably know). The death benefit in increasingly paid for by the “cash values” which are the property of the company (they can be borrowed). The company get off the “hook” for paying a death claim, especially at later years.

    • Steven Gibbs
      Steven Gibbs

      Stewart, if you think that a reputable whole life company makes a habit of “getting out of” legitimate death claims, you have alot to learn. You are correct in your assertion that policy loan proceeds reduce the death benefit. However, this isn’t a hushed mysterious way for companies to “get out of” claims. Rather, this is common knowledge and entirely reasonable because the cash value finds the death benefit, as you point out. So, the natural impact of having unpaid loans is to have the death benefit reduced. So, I encourage you to take a fresh look because your perspective of what is right or wrong about high cash value whole life is skewed. As a side note, we get inquiries from all of over the world, asking if they can get this asset and the answer across the globe is that corruption has eliminated this option for most world wide. This is pretty much the only asset where one can invest in guaranteed growth, with tax relief and even share gains (dividends) in the case of mutual participating companies. Seriously, seek some understanding on this. Best to you.

      Steve Gibbs for I&E

      Steven Gibbs is a licensed insurance agent, and the following agent
      license numbers of Steven Gibbs are provided as required by state law:

      Resident License; AZ agent #17508301,
      Non-resident Licenses: TX agent #2273189, CA agent #0K10610,
      LA agent #769583, MA agent #2049963, MN agent #40563357,
      UT agent #655544.

  • Terry L & Judith J Blush
    Terry L & Judith J Blush

    What happens when you are old and the premiums become cost prohibitive?

    • Steven Gibbs
      Steven Gibbs

      Hi and thanks for connecting,

      The life insurance component of any policy does become more expensive for a new applicant based upon age and thus the sooner someone locks in, the better. However, with whole life, the premiums are fixed and level and thus do NOT increase with age once the policy has been issued and accepted. This is actually why a properly designed whole life policy offers a massive advantage over term and even arguably IULs because the cost will decrease and eventually can be fully paid off depending upon choices and design. Othger options for folks who are older and can’t afford premiums for a new policy could include an annuity (if suitable) because this isn’t handled in the same way for cost purposes.

  • tom haws
    tom haws

    You all arw extremely biased for wli. it is one of the worst investments ever devised by the insurance industry(and that is really saying something). Your criticism of Raul was extremely weak and mad no sense. Why do you think 70 % of the buyers of WLI cancel it within 10 years. Raul said the person would have had 24000 dollars and he was counting zero return on his money for that comparison. You ignored that and started talking about fees and commissions in mutual funds. In Raul’s example the customer coud put the money under his mattress and come out way ahead of the ripoff WLI policy. You are typical WLI salesman. Your arguments are ludicrous.

    • Insurance&Estates

      Hello Tom, in respect of your freedom of speech and differing opinion I welcome your comment and yet disagree whole heartedly for a few reasons as follows:

      1. As an estate planner, I don’t advocate for whole life as an “investment” however, when a dividend pays 4-6% which is a documented fact and the “asset” is a safe and predictible one which allocates all the risk to the insurance company, I am at a loss to how you harness such a inaccurate view of it. Actually, the real tragedy is when folks lack life insurance at an vulnerable age and often regret cancelling it. And, most people cancel because it was not properly sold or designed and/or they lacked a commitment to building it.

      2. As far as Raul, I’ll just say that the “would have had” syndrome is a common one in the gamblng world of Wall Street that primarily serves the movers and shakers there. Commissions in whole life are extremely modest by comparison.

      3. I am a far cry from the “typical whole life salesman”. I am an attorney with 20 years of estate planning experience and personally practice what I preach about “high cash value whole life”. Myself and our many clients deem properly designed dividend paying whole life to be among their most valuable assets, as do most large banks and major corporations in the U.S.A. Consider whether you are the typical Wall Street devotee with blinders on.

      Best, Steve Gibbs for I&E

  • Raul Chavez
    Raul Chavez

    Too bad you can’t have a non biased article from a whole life insurance agent. Couple of facts to consider:
    Purchasing a very affordable Term policy and then taking the substantial difference in cost between a Term policy and a Whole Life policy and investing that difference will result in the person ending up with way more money in their investments than what they would ever have in a Whole Life policy.
    Even investing in a simple S&P 500 Index mutual fund has historically had over a 10% rate of return.
    Another interesting stat would be the actual number of people that keep their Whole Life policies past 30 years. Here is a very good example that happens all the time. Two families: One purchased a $100 a month Term policy and is investing $500 a month.
    The other purchased a Whole Life policy for the same amount of coverage but paying $600 a month.
    Say 4 years go by and the family faces a significant financial emergency. There is no way that family will be able to make those $600 a month payments and to add insult to injury they don’t even have any Cash Value build up in their Whole Life policy because for the first 5 to 7 years the clients get hit with SURRENDER FEES. Why is that? Because of the HUGE COMMISSIONS the agents get paid for selling those whole life policies. So what ends up happening with this family is that they loose everything, they life insurance policy and all the money they gave the insurance company.

    Now let’s take the same scenario with the other family that bought the $100 a month Term Policy but then invested the difference of the $500 a month. So after those 4 years of paying for the life insurance and now facing a significant financial emergency this family WOULD be able to still maintain their Term life policy because it’s ONLY $100 a month and NOT $600 a month. They would also have access to the money they have been investing, which not even counting any growth in their investment that would be $6,000 a year or $24,000 over the 4 years. So they would have $24,000 available to take care of any financial emergency and still be able to pay the $100 a month premiums to KEEP their Term Life insurance and protect their family!

    That is precisely why every 3rd party source that has NOTHING to do with the insurance industry always recommend Term Insurance as the best and most affordable option to protect one’s family (Consumer Reports, Money Magazine, Kiplingers, etc. etc.)

    • Insurance&Estates

      Thanks for commenting Raul, we all have our biases; however, mine are based upon creating predictability, as an alternative to the gambling wheel of Wall Street, and given the smoke and mirrors that are pushed by Wall Street and term agents. Your objections to whole life are commonly touted, and while of few of your points are worth considering, many are simply wrong.

      For started, the idea of 10% “average returns is a rolling 20 year average and extremely misleading. How many people do you know that leave assets in the market for 20 years. If its a mutual fund, how about those fees?

      Also, the idea that whole life agents make “huge” commissions is a gross exaggeration. Simply put, commissions are very reasonable when compared to what fund managers or those in the financial arena get to charge under the radar. Also, for those selling high cash value policies, commissions are even lower and a high level of expertise is required.

      As far as folks not continuing to pay, this point says zero about the value of the permanent coverage. Actually, the opposite also occurs where people let coverage lapse or their valuable “term” insurance expires and then can no longer get life insurance due to health changes.

      I promote various solutions, first as an estate planner and NOT as a biased insurance agent. With that in mind I’ll say that there are too many flawed assumptions to count in this very one sided look at whole life. We’ve addressed all of these in detail in numerous articles and videos.

      I sincerely hope you stop listening to the financial entertainers and Wall Street talking heads and look deeper.

      To your success. Steve Gibbs, for I&E

      • Shantanu Paul
        Shantanu Paul

        At least lets be truthful about commissions.
        Average commissions on Whole life for the agent is ~70-110% of first year premium and 1-2% residuals.
        YOu are really going tell people this is less that 0.05% management fees on index funds and ~.5-.9% of actively managed ETFs?!!

        • Insurance&Estates

          Hi Paul, thanks for the comment. The whole life policies we are advocates of pay commissions of 20-30% depending on the policy design. In contrast, actively managed ETFs are charging .70% year in and year out. So as your account grows, so do your fees. So if a whole life policy premium is $20,000, our commission would be around $4,000. Contrast with an actively managed ETF that would take .70% a year, every year for however long the account is open. Over the long term you would pay much higher fees with the actively managed ETF then the start up cost for the whole life policy.

          Best to you!

          Steve Gibbs, for I&E

          Steven Gibbs is a licensed insurance agent, and the following agent
          license numbers of Steven Gibbs are provided as required by state law:

          Resident License; AZ agent #17508301,
          Non-resident Licenses: TX agent #2273189, CA agent #0K10610,
          LA agent #769583, MA agent #2049963, MN agent #40563357,
          UT agent #655544.

  • hughey gresham
    hughey gresham

    If I buy a $10,000 whole life policy . When I reach the $10,ooo in payment do I quite paying and still have the full amount .

    • Insurance&Estates

      Hello and thanks for commenting. The short answer to your question is yes, you can design a whole life policy to be “paid up” in 10 years. I’m not sure what you mean by “full amount”. For a more detailed look, I suggest that you connect with one of our Pro Client guides starting with Jason Herring at jason@insuranceandestates.com.

      Best, Steve Gibbs, for I&E

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