Home » Life Insurance

Whole Life Insurance is a Terrible Idea if You Have Student Loans

Whole life is perhaps one of the crappiest financial products sold as investments that exist anywhere. This is even more true if you have student loans. I've seen a rash of clients lately who have six figures of student debt, and they have a whole life policy, too.

They're paying several hundred dollars or more a month into their whole life insurance despite having interest accumulate at 7% or higher (without any tax deduction too). We'll discuss why whole life is such a bad idea if you have student loans and why so many get sold whole life.

You should really just get a term life policy from a place like Policygenius. That referral link allows you to shop a bunch of places all at once. 

Whole Life is Not Only a Bad Investment, the Premiums Aren't Tax Deductible

If you've got student loans on the federal repayment programs, you want to do everything possible to reduce your adjusted gross income.

For Public Service Loan Forgiveness (PSLF), every dollar you can avoid paying into your loans is literally money in your pocket when they're forgiven tax-free. Since Revised Pay As You Earn is 10% of your income, you want to reduce that income if at all possible. That means putting the max into retirement accounts.

So each $1 you put into your 401k saves you 10 cents in take-home pay if you go for PSLF.

If you're not going for PSLF, lower income still means more interest subsidies under the REPAYE plan. The lower payment means the government covers 50% of the remaining interest. So that's worth about 5 cents in take-home pay.

Either way, there's a hidden match to saving money in your retirement accounts if you have student loans. That alone trumps the exaggerated benefits of whole life.

Whole life insurance premiums are not tax deductible on the front end. The cash value grows tax deferred, but you don't get the deduction upfront. That means it does nothing to help with any debt repayment strategy.

Whole Life Insurance Rates of Return are Also Pretty Poor

Buying a whole life policy really stinks even if you don't have student loans. After all, the rates of return are very low compared to investing in index funds long term. A projection from Insure.com, which is trying to sell you on the merits of whole life, says that you might earn 2% on your policy if you pay the premiums in the first 10 years.

A huge number of policies lapse in the first 5 years. What's the annual rate of return on those policies? -10.7%.

What's even crazier is that I imagine this is an optimistic assessment. Annual return numbers look better if you hold the policy for decades, but almost nobody does. When your best case scenario is a 4% annualized return if everything works out perfectly and you don't touch the money for decades, that's a pretty awful product.

So why would anybody invest in something that offers no upfront tax deduction, gives you inferior rates of return, and that so many people bail out of in the first few years of owning the policy?

Related: The Exception to the Rule: When Whole Life Insurance Makes Sense

Agents Make Huge Commissions Selling Whole Life Insurance

Why would anybody invest in a product that stinks from an investment perspective and doesn't help you from a student loan perspective? The answer is that insurance companies pay monster commissions for selling these policies to people.

How much do you ask? Some companies pay as much as 100% of the first-year premiums to the selling agent. Often, a company might pay 50% of the second-year premiums to that agent too. That's why if you look at the cash surrender value, most policies will show almost no balance because all the premiums basically go back into paying the agent's sales fees for the first few years.

If you are an insurance agent, and you can sell a dentist on a $1000 a month policy and get paid 100% of that, you might've just earned $12,000 in year 1. That's not even talking about the money you could get if the client keeps paying the premiums in future years.

What's the answer to the universe and everything when commissions are that high? Whole life of course.

The Answer to Everything for an Insurance Agent is Going to Be Buy Insurance

Need to save for retirement? Buy whole life. Saving for kids college? Whole life. Want to build up funds to open a practice in the near future? Oh hey have you looked at how great whole life is?

The only time permanent life insurance might make sense is in the context of multimillionaires and estate planning. All the other uses is supposedly has are sales and marketing techniques that cost people way too much money.

Most Whole Life Agents Are Good People Trying to Make a Living Who Happen to Be Selling a Lousy Product

I'll be frank and say that whole life insurance agents are not a super-wealthy group on average. Some make a killing, but the typical one is struggling to make a decent middle-class income. Most burn out of the profession within a couple of years after exhausting their friends' and family's contacts.

He or she is certainly not getting rich peddling these policies because of the intense sales effort and frequent rejection they must endure.

There's a lot of good people selling whole life, and I'm friends with many of them. That doesn't mean the product they sell is good though. When someone's livelihood depends upon them selling X% of product A, then product A is going to be the solution to everything.

Problems I'm Seeing with Clients with Student Loans and Whole Life Insurance

When I'm advising people on how to save a lot of money on their student debt, there are a few general pathways to go down. First, you can refinance student loans and get a lower interest rate. Second, you can go for PSLF while working at the government or a 501c3. Third, you owe so much that the forgiveness options are your only hope.

In all those situations, you either want to free up money to pay off the debt fast (refinancing) or to max retirement accounts to take advantage of interest subsidies (the other two). Whole life doesn't fit into any money-saving strategy around student loans at all.

Some of the most egregious cases I've seen is when clients have not one but TWO whole life policies. The agent clearly wanted another commission so he came back for seconds. Other clients fall for a smooth-talking long-term acquaintance/friend who sells them a big policy upfront. That's especially true for dentists and doctors with their high incomes.

If You've Got Student Loans AND a Whole Life Policy, Maybe You Should Take a Look at Just Getting Term Life

There are other non-insurance-related abuses going on in the area of financial advice and student loans, but selling whole life to someone with a really high interest rate is just blatant self-interest on the part of agents.

Why would you buy an “investment” that best case would yield around 4% max if you held it for 30 years when you have non-tax-deductible debt at a 6% to 8% interest? The answer is because your life insurance agent either didn't understand student loans or frankly just didn't care.

Anybody with student loans probably needs a big term life policy. A 20 to 30-year term is most likely the best option. It also costs 90% less than whole life on average.

I Can Probably Help Anyone with >$100,000 in Student Loans and a Whole Life Policy

If you got sold a whole life insurance policy, my suggestion is to cut your losses and cancel it. There are a few cases where that's not the right course of action, but it's rare.

I'm not a financial advisor, but I can let you know the approximate cost difference between term and whole life. I can also share my opinion that whole life is a lousy product that exists because insurance companies pay people huge commissions to sell it.

If you're dealing with six figures in student debt and have been throwing a few hundred a month into a whole life policy you don't understand, please reach out.

Get Your Own-Occupation Disability & Term Life Quote

What insurance coverage do you want a quote for? (check all that apply)

GET TERM LIFE QUOTES IN JUST 2 MINUTES

Height

Weight(lbs)

Have you had any recent surgery or hospitalizations?

Do you take any medication?

Do you have any medical conditions?

Are you a smoker?

NEXT

Full Name

Date of Birth

Email

Phone Number

Gender

State of residency

Specialty

Citizenship status

Communication preference with SLP Insurance

Any additional questions or comments?

GET MY QUOTES


Refinance student loans, get a bonus in 2024

Lender Name Lender Offer Learn more
sofi
$500 Bonus
*Includes optional 0.25% Auto Pay discount. For 100k or more.
Fixed 5.24 - 9.99% APR*
Variable 6.24 - 9.99% APR*
splash logo
$1,000 Bonus
For 100k or more. $300 for 50k to $99,999
Fixed 5.19 - 10.24% APPR
Variable 5.28 - 10.24% APR
earnest
$1,000 Bonus
For 100k or more. $200 for 50k to $99,999
Fixed 5.19 - 9.74% APR
Variable 5.99 - 9.74% APR

Comments

  1. Eric Dean July 29, 2017 at 12:42 PM
    Reply

    Thanks for sharing, Travis! You make some great points about maxing out retirement accounts and reducing income to take advantage of certain student loan programs. As an independent financial advisor working with dental professionals early in their careers, I see whole life insurance being sold way too early in the planning process and without all factors being considered. In many cases, it would be best to start with term insurance. If a whole life policy has already been purchased, it may be better to restructure the policy vs. surrendering. If structured properly, it might be possible to increase the rates of return to make it part of a viable investment strategy. If someone is recommending you purchase a whole life or other permanent life insurance policy without reviewing your full financial situation, you may want to think twice and I would be happy to provide a second opinion.

    • Travis July 29, 2017 at 2:16 PM
      Reply

      The way I’ve generally heard it is if you bought it within 3 years it’s best to just cancel it and move on. If you’ve had it for longer then you need to do some math to figure out what the best thing to do is.

  2. Janelle June 5, 2020 at 4:53 PM
    Reply

    Travis,

    I would like to challenge some of the points you made – as a CFP, I use whole life in a lot of my planning cases. While you are right, there are ‘insurance salespeople’ but there are also financial planners. If understood correctly, whole life is actually one of the best financial pieces you can add to a plan. Your comment about getting out after 3 years- if educated correctly this wouldn’t be implemented into a plan unless it fits the client’s goals and needs nor would it be positioned as an investment vehicle, quite frankly that’s not it’s purpose in the slightest. Whole life absolutely can be used to pay off student debt faster, and the best part is, that poor rate of return you mention is guaranteed, unlike most forms of actual investment vehicles. If you were to see how a whole life policy works, you would see that after the three years and your cash value starts to really take off, you can take that cash value out and pay the student debt down.. and the best part is cash value continues to grow inside at that poor IRR of 4-5% like nothing was taken out. Do you know of any other vehicle that allows you to do that? Those people that ‘bailout’ unfortunately did not have an advisor that had their best interest, which happens more often than not. I’m sorry if you had a bad experience with the product and that’s why you wrote this, but if you truly understood it, it’s use and the benefits you wouldn’t have wrote this article.

    **For anyone that is reading this article, I would advise you not to educated on the product yourself, and with that, you will find that it can most certainly help pay down student debt faster while giving you other benefits. Ask your advisor to show you illustrations on the product and it will quite literally prove itself.

    • Travis Hornsby June 18, 2020 at 12:02 AM
      Reply

      “If educated correctly”

      I have yet to find a person sold whole life that after explanation understands what they actually bought.

      And if an advisor took all that time to explain the product, long term that person is better off with investing directly with an advisor who will make sure they don’t bail when markets fall, and they’ll get close to a full market return vs having the insurance company skim a few percent off the top.

      A product that fails the majority of the time regardless of the reason is something that doesn’t pass the smell test, and a majority of policies get cancelled within three years, showing whole life is not a long term investment a millennial should consider.

Comment or Ask a Question

Your email address will not be published. Required fields are marked *