There are many different types of life insurance, each with their own pros and cons. Whole life insurance, unlike term life, has no expiration date. However, it does come with plenty of downsides that make it hard to recommend to young adults. Here are top 5 reasons to avoid whole life insurance as a young adult.
1) High Cost
No matter your age, a whole life insurance policy can be incredibly expensive. For many young adults, paying twenty times more than a term life insurance policy is just too much. Both whole life and term life will give you the same peace of mind for the next 20 or 30 years. The main difference is a whole life will drill a bigger hole in your bank account. A term life is much more affordable.
2) Cash value not impressive
As a young adult, explosive rates of return can be made from other sources. Sources such as energy stocks, commodities, and cryptocurrency. When you look at an asset class like cryptocurrencies as volatile as it is. It is the most consistent at creating the highest rates of return in the last decade. And this is despite the bad reputation it gets for its volatility.
Whole life rates of return may be guaranteed but it’s a snail’s pace. Almost like waiting for a turtle to cross the finish line. Not so impressive. On average rate of return on whole life is 4 % on the high-end side. While cash value is a nice feature to have, it doesn’t mean much if it can’t keep up with inflation.
3) Lower death benefit
Because the cost of a whole life insurance is so high, you’re more likely to opt in to receiving a lower death benefit. And if you have a lower death benefit, it means your family is not properly protected. And if your family is not properly protected, then that can lead to financial challenges. A death benefit being paid out but it was not enough. Ultimately you want to be able to replace your source of income for at least the next ten years. In turn, your family can avoid having sudden financial challenges. Thus, allowing financial protection for more than just a year or two when considering to replace someones income.
4) There are too many better alternatives
Don’t get us wrong—whole life insurance can be a very useful product, but it’s often not needed by young adults. Buying a whole life as a young adult is like signing up to pay for insurance for the rest of your life. To the extent, where you may even end up paying more into the whole life policy than the actual worth of the death benefit once you hit 80 or 90 years of age. That’s if your healthy and live that long which nowadays most people can easily live up to the age of 90..
5) Inflation erodes its value
When you start to gage how the value of everything around you starts to rise. It does so with the cost of living. So, while in today’s world half a million dollars may feel like a lot of money. Forty years down the road when you’re still alive, the value of half a million will feel like $100,000 and not feel quite as powerful.
So, when paying into a whole life, the actual dollar value of the death benefit deteriorates as you get older. It’s not something I would personally mind if I had a term life insurance. But with a whole life where I’m paying twenty times the cost, and knowing the death benefit is losing purchasing power for the next 40-50 years I live…That’s a bit of a thorn in the side of my head. Once you understand how the purchasing power of the US dollar is devalued overtime, whole life makes little sense for younger adults
Term life is best utilized for younger adults, the only time a whole life would make any sense is when you are a senior and simply looking to cover the cost of your final expenses with a low death benefit policy.
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