This parent on Reddit regrets taking out a $150,000 whole life insurance policy for their 1-year-old — but they’ll only get $30 if they cancel. Are they trapped permanently?

The problem with whole life insurance

Whole life policies consist of two parts: the death benefit — which is the lump sum your beneficiary receives — and cash value, which is a built-in savings and investing feature.

While there are certainly plenty of benefits — such as tax breaks, fixed premiums, and potential loan collateral — it's important to understand all aspects of whole life insurance policies before making this important financial decision.

Because whole life insurance offers both lifelong coverage and a cash value, it tends to be considerably more expensive than term life insurance.

In fact, personal finance celebrity Dave Ramsey explained that, in the first three years alone, these policies can be 20 times as expensive as a term life policy that provides similar coverage.

PolicyGenius reports that the average cost of whole life insurance is $440 a month for a healthy 30-year-old with a $500,000 policy.

While these policies come with a savings feature called cash value (which you can borrow from when you’re alive), that monthly rate is significantly steeper than a term life policy rate.

In general, whole life policies are considered an unnecessary investment by many financial experts as their primary purpose is to pay out a death benefit to the beneficiaries in the event of the person’s death. But once the child is an adult, most parents wouldn’t need a death benefit to stay afloat financially in the event of the adult child's passing.

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When is whole life insurance a good idea?

Whole life insurance can be a good idea for people who can afford the higher monthly premiums. That's because a whole life policy’s cash value can be a form of forced savings.

Whole life insurance could also be a savvy move if you have a dependent with a disability. If you're buying life insurance to protect your children financially, a 20- or 30-year term policy could suffice under most circumstances, since that carries you through to when they become adults. A child living with a disability may need lifelong care, though, so you may need a more permanent policy because of that.

Instead, many parents purchase small life insurance policies on their children to help cover funeral costs in the event of the unexpected death of the insured child. But due to the cost of whole life insurance, it typically doesn’t make sense to put it in place for a young child, especially one who is still a toddler.

What to do if you regret buying whole life insurance

If you regret buying a whole life insurance policy for your kid, your best bet is to reach out to your insurance company and ask what options you have. You may be able to convert your policy to a term life policy or reduce your policy's death benefit to lower your premiums.

You can also choose to cancel your policy if you can't afford it or realize it doesn't make sense for you. However, in that case, you'll be subject to a surrender fee.

If the surrender fee exceeds your policy's cash value, you won't get anything out of it. Otherwise, you'll typically get your cash value minus the surrender fee.

As for the aforementioned Reddit situation, due to the policy being fairly new, they are looking at a mere $30 cash value if they cancel their policy. However, given the cost of the monthly premiums, and the fact that they’re only a year into investing, losing out on the $1,470 they’d invested may be the best bet — even if it is a bitter pill to swallow.

However, this can be a far better option than continuing to set aside good money for a bad investment.