Should You Buy Whole Life Insurance? Here's What Ramit Sethi Thinks

Is a whole life policy worth buying? Here's what one expert has to say about it.

Whole life insurance is perhaps one of the most controversial financial products in existence. You'd think that wouldn't be the case, since life insurance is such an important thing to have.

But actually, life insurance comes in different forms. There's term life insurance, which covers you for a preset period of time, versus whole life insurance, which covers you on a permanent basis (meaning, until the day you die).

Many financial experts are strong advocates of term life insurance. But there are also plenty of financial gurus who strongly advise against buying a whole life insurance policy.

Ramit Sethi is one of those people who's not a fan of whole life insurance. In fact, he thinks whole life insurance is a scam. And when you dig deeper, you might come to feel the same way.

The big problem with whole life insurance

There are two primary benefits to buying whole life insurance. The first is getting permanent coverage, as opposed to term life insurance, which may eventually run out on you.

Also, whole life insurance policies accumulate a cash value over time. That's money you can take out of your policy if you want, or borrow against.

With a term life insurance policy, there's no accrued cash balance. If you get a 30-year term life policy and don't pass away within those three decades, your policy won't be worth a dime once it expires.

But despite these benefits, there's a big problem with whole life insurance -- it's extraordinarily expensive. Many people who sign up for whole life policies wind up letting them lapse because they can't keep up with the cost of their premiums. And guess how much a lapsed whole life policy is worth? In cases where that coverage is surrendered early on, nothing.

Plus, whole life insurance policies are generally not invested in a very aggressive fashion. As such, they don't tend to grow so nicely.

Or, to put it another way, if you were to take the money you'd spend on a whole life policy and invest it in a brokerage account or IRA, you'd potentially score a much higher rate of return yourself. In that case, it pays to spend less on term life insurance and invest the difference yourself -- where you also get control over how your money is invested.

Is there anything good about whole life insurance?

One small benefit of whole life insurance is that it can serve as a means of forced savings. If you're the type who doesn't tend to do a good job of socking money away, then by paying those whole life premiums, you're effectively forcing yourself to save. As mentioned, you can cash out your policy down the line instead of raiding a savings account or IRA.

But all of that assumes one thing -- you're able to keep up with your policy's premiums. And that's certainly not a given.

So if your goal is to protect your loved ones financially, then buying a term life policy may be a better bet. And if your goal is to force yourself to save and invest money, setting up an automatic transfer to your savings account, brokerage account, or IRA could be a more effective system than sinking money into a whole life policy you might eventually have to drop.