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Buying life insurance is usually a good thing — but getting the right type of coverage is crucial.
Key points
- My husband bought $1 million in life insurance before we were married.
- He purchased a whole life policy instead of a term life policy.
- We’re paying more than we should for coverage.
Before I got married, my husband purchased a life insurance policy with a $1 million death benefit. His brother was originally the beneficiary, but after we bought a house together and decided to get married, he switched the policy so I would be paid the death benefit if he passed on.
While it may seem like a good thing on the surface that he’s provided so much financial protection in case something goes wrong, the reality is that I wish he did not have this policy. And there are three big reasons why that is the case.
The policy is unnecessarily expensive
The big reason why I wish my husband did not have his $1 million life insurance policy is because he bought a whole life plan instead of a term life insurance plan. He did this on the advice of a financial advisor — likely one who was incentivized to sell him this coverage because of a higher commission that can be paid out with permanent life insurance.
The fact that the policy is a whole life plan instead of a term life one means it is extremely expensive. It costs around five times what we would have paid for a comparable term life policy providing the same level of coverage. And the high premiums he pays leave us with less money for other things.
Unfortunately, the added coverage we are paying for isn’t really necessary for us. While it is true that whole life policies always pay out a death benefit while term life policies pay out only if the policyholder dies during the coverage term, we do not need lifetime insurance coverage. Once our mortgage is paid off and our retirement accounts and children’s college funds are funded, we will no longer need a death benefit at all.
We could be earning better returns elsewhere
My husband was partly sold on the whole life policy because he was told it was a good investment. Part of his premiums are invested and he’s guaranteed to earn a certain return over time. His advisor told him we could borrow against this to help fund retirement or could cash in the policy if we wanted to.
The reality, however, is that while whole life policies have an investment component, the returns they promise are relatively low — especially after taking fees into account. We could easily earn more money elsewhere if we had a cheaper term life policy and invested the money we would have saved on premiums.
I don’t like the fact that we are getting a lower return than we could be getting, simply because we have this policy in place that we need to send so much money to each month.
It’s difficult and costly to cancel
So, after reading about the downsides, you may be wondering why we don’t just cancel the policy. The answer to this question is the other big reason why I wish we didn’t have this coverage.
Unfortunately, there are surrender fees and other costs associated with cashing in the policy and we would end up losing virtually all of the value of the money my husband has already paid in. Since he’s older now, it would also be more expensive than it used to be to put a term life plan in place.
Ultimately, we’ve decided it’s not worth canceling the coverage now, even though it would have been better if he’d never bought the plan in the first place.