Is Whole Life Insurance Worth It? Ramit Sethi Has a Simple Answer

You could end up overpaying a lot.

If there are people in your life who depend on you financially, or might end up struggling financially if you were to pass away, then it's a good idea to buy life insurance and designate those people as your policy's beneficiaries. But you have choices when it comes to getting life insurance. And the type of coverage you choose could determine how much your policy costs you.

Generally, life insurance is broken down into two main types: whole life insurance and term life insurance. With whole life insurance, you get perpetual coverage. Once you put your policy in place, it remains in effect for the rest of your life, provided you keep paying your premiums and don't fall behind.

Whole life insurance can also accumulate a cash value over time. That gives you the option to borrow against your life insurance policy should the need arise, or even take cash out of it.

Term life insurance works very differently. For one thing, you'll only be covered for a limited period of time, known as the term. And also, term life insurance won't accumulate a cash value. The only way to get a payout from a term life insurance policy is to pass away. And that's really not what you want.

But while whole life insurance might seem like a good deal based on these factors, you should know that it generally costs far more than a term life policy. And while you might think that higher price tag is worth it, financial guru Ramit Sethi says otherwise.

Don't waste your money on whole life insurance

In a recent tweet, when asked if whole life insurance is worth buying, Sethi's answer was an emphatic "no." He then followed that up by saying "some questions have very simple answers."

The reason experts like Sethi tend to discourage people from buying whole life insurance really boils down to cost. Yes, whole life insurance might offer longer coverage than term life, and there's that cash balance you can dip into or borrow against as needed. But if you save yourself money on life insurance premiums by opting for a term life policy instead, you can bank and invest all the money you're not spending, thereby landing in a much more solid financial position down the line.

In fact, you'll often hear that whole life insurance is a means of forced savings. But you know what you can do instead? Pay less for life insurance and save the difference.

If a term life insurance policy costs you $3,000 less per year than a whole life insurance policy, you can bank that extra money and invest it for decades. That could leave you a lot richer later in life -- wealthy enough that you're in a position where you don't have to cash out a life insurance policy or borrow against it.

A risk you shouldn't take on

The primary danger in buying whole life insurance is struggling to keep up with your premiums to the point where you fall behind and your coverage is yanked out from under you. So don't take that risk. Instead, shop around for term life insurance and secure a policy that better fits your budget.

You may find that having a term life policy is a lot less stressful. At the same time, it could end up providing more than enough coverage for the important people in your life.