These Are the Worst Reasons to Buy Whole Life Insurance

Don't make a mistake and buy the wrong type of insurance coverage.

Buying life insurance is a smart financial decision for those people who have anyone depending on them. That's because coverage could save loved ones from financial disaster in case an untimely death occurs.

But while it's a good idea to get life insurance coverage, the type of policy matters a great deal. Specifically, while buying term life insurance can provide affordable and essential protection, buying a whole life insurance policy is often a bad choice because of unnecessarily high premiums that end up being a big waste of money.  

Unfortunately, many people buy whole life insurance for the wrong reasons. To make sure this doesn't happen, consider these four really bad reasons for buying this type of coverage. 

1. Because of a misunderstanding about insurance needs

Sometimes, people buy whole life insurance because they don't really understand the actual purpose of life insurance coverage and they don't think carefully about their needs.

Life insurance coverage should replace income or services that a policyholder provides while people are depending on that policyholder. For example, say a policyholder has a wife with a joint mortgage and two children who will need to be educated. 

The policy's death benefit could replace the income he was bringing into the house that the wife was dependent on since their lives were built on being a dual-income household. The death benefit could also repay the family mortgage and cover the children's education.

Eventually, however, the policyholder would stop working and start relying on retirement funds. The mortgage would be paid off, and the kids would be grown and through college. At this point, no further life insurance coverage would be needed at all. 

If the policyholder had purchased a term life policy, the coverage term could be scheduled to end once these milestones occur. But if whole life coverage was purchased, it would provide unnecessary protection at this point -- and at a substantial cost. 

2. Because costs weren't compared

Another bad reason for buying whole life coverage is because consumers aren't aware of how much more expensive this coverage can be. Whole life premiums could typically cost between five and 15 times more than premiums for a term life policy. There's very little reason to spend so much extra except in rare cases where coverage really is needed for life. 

Consumers who don't get multiple quotes and compare insurance options may not realize the big difference in price, and this could lead to paying a much more expensive premium for no reason. 

3. Because of a mistaken belief it's a good investment

Some people buy whole life insurance because it has an investment component. Consumers may believe it's a good idea to get a policy that they can cash in or borrow against to help fund retirement.

Unfortunately, whole life insurance has many fees and restrictions that often make it a poor investment choice compared with a standard retirement account or even a taxable brokerage account. In almost all circumstances, consumers are much better off choosing other investment products and using the extra money a whole life policy would cost to buy these other assets. 

4. Because unscrupulous advisors push these policies

Finally, the single worst reason to buy a whole life policy is because advisors push consumers into doing so. Sometimes, this occurs because whole life policies can pay a much higher commission. Advisors who don't act in their customers best interests may suggest whole life coverage to enrich themselves.

To avoid buying the wrong coverage, consumers should make sure they are educated about insurance policies available and should compare all their options before putting a life insurance policy in place to protect loved ones.