Whole life insurance is like having a savings account that you are forced to put money in each year. Its main function is to protect your family with a lump sum payment if you die prematurely. However, as long as you pay the premiums, the whole life also accumulates savings (building up a cash value) that you can withdraw at the end of the term. If you purchase a 20- or 30-year whole life policy for $400,000 face value, at the end of 30 years, even if you have not died, you can withdraw the $400,000. However, a whole life policy is not a good investment from an economic point of view. The insurance company takes your premiums and invests them, at 7% or 8% annual return. They offer you a guaranteed return on the policy of anywhere between 1.5% to 3% annual return and keep the difference. This is simply not a good deal for you.
Instead, you should purchase a term life policy. This does not build up cash value; rather, it is similar to auto and homeowner’s insurance in that you are paying for coverage only against the event of your premature death. Because you are not building up cash value, term life insurance is inexpensive. The premium, of course, depends on your age and health, but the average national cost of a term life policy for a healthy 30-year-old male is $26 per month for a $500,000 policy. The policy premiums will likely increase every year, so be sure to shop around.
A 2020 report by McKinsey and Company showed that life insurance companies have suffered from a decade of declining profitability and growth. One major reason is that customers (and financial advisors) question the value of whole life insurance. McKinsey recommends several changes to revive insurance companies, including a more personal connection to customers and invention of new products, such as whole life policies that can be converted to long term nursing home care policies. We will have to wait and see.