By Barbara Marquand
Whole life insurance can be a good choice for some people, but like many financial products, it's not for everybody.
That's important to remember if you're feeling overwhelmed during a whole life insurance sales pitch.
Whole life is a type of permanent life insurance. Unlike term life, which covers you for a certain number of years, whole life insurance provides coverage for your entire life. A whole life policy also includes a savings component known as "cash value." The cash value grows slowly tax-deferred. You can borrow against the cash value or surrender the policy for the cash. The combination of permanent coverage and the savings component are why quotes for whole life are so much higher than for term life.
Here are five things insurance agents say to sell whole life and what you should know before buying.
1. 'You can use a whole life insurance policy to supplement retirement savings'
Sales pitch: You can borrow money or take partial withdrawals from the cash value during retirement to supplement income from other sources.
What to know: A permanent life insurance policy might be worth buying with an eye toward retirement planning, but only if you've maxed out contributions to tax-advantaged retirement accounts, such as 401(k) plans and IRAs, and you have money to spare in low-yield accounts. Loans that are not repaid will reduce the death benefit. Removing too much cash value could cause the policy to lapse.
2. 'You won't lose money if the stock market tanks'
Sales pitch: The return on the cash value is guaranteed. As long as you keep paying the annual premium, the cash value will grow at the rate promised.
What to know: Buying whole life insurance is a long-term commitment. The cash value accumulates slowly. You'll need to hang on to the policy for some 20 years to see significant growth. If you back out of the policy in the early years, you'll pay a surrender fee and have little or no cash value to show for the thousands of dollars you paid.
3. 'Everybody should have at least some permanent life insurance'
Sales pitch: Even if no one depends on you financially, life insurance can still serve an important need. Your heirs will be able to use the life insurance payout to pay for the funeral and any other final expenses you leave behind.
What to know: Whole life works as an estate planning tool if you have an estate large enough to be taxed after you die. For federal estate taxes, that's any estate worth more than $5.45 million for a single person and $10.9 million for a couple. Your heirs could use the money to pay the taxes. If you're only worried about funeral expenses, consider other ways to plan. The nonprofit Funeral Consumers Alliance suggests opening a bank account that's "payable on death" to a loved one who will handle the funeral arrangements.
4. 'A whole life policy is a great gift for a child'
Sales pitch: You can buy a whole life policy on your child and then transfer the ownership to your kid once he or she reaches adulthood. As the policyholder, your adult child will have access to the policy's cash value and will have lifelong coverage. Some policies will give the option to buy additional coverage, even if your son or daughter develops a health condition.
What to know: As a policyholder, the adult child will have to keep paying the premiums to maintain the coverage. Most fee-only financial advisors, who don't sell life insurance, say there are better ways to save money for a child, such as setting up a 529 college savings account.
5. 'You can earn dividends to increase the value of your whole life policy'
Sales pitch: Many life insurance companies share financial surpluses in the form of dividends at the end of the year with whole life insurance policyholders. You can take the dividends as cash, use them to pay premiums or buy more coverage, or leave them on deposit to earn interest.
What to know: Only mutual insurance companies pay dividends. Whether they pay and the amounts are not guaranteed. The dividend is based on your cash value. The more cash value you have, the higher the dividend. Dividends will be minimal in the policy's early years.
These are just some of the arguments for whole life. Make sure you understand how a policy works before you buy. Talk to a financial advisor who doesn't make commissions on product sales to learn whether you're a good candidate for whole life insurance and to explore alternatives.
Barbara Marquand is a staff writer at NerdWallet, a personal finance website. Email: bmarquand@nerdwallet.com. Twitter: @barbaramarquand.