Whole Life vs Term Life

[Todd Gack]

So when I was 26, (I'm 34 now) I bought a Whole Life insurance plan. At the time, I was single, wanted to diversify portfolio, and had some cash to spend. I was never comfortable putting money into the stock market (looking back, I should've started investing there. . .lol) so I wanted something more conservative. I already have a Roth, 401k from work, and even some liquidity in small amounts as an 'emergency fund.' Pretty much everything except specific stocks. Fast forward to present day where I still have my policy, a wife, and 2 kids. I have friends that were surprisingly hateful of Whole Life. It was brought up in a conversation one time and one of them was just downright negative about the whole thing and told me I needed to cash out immediately and just get term. I couldn't believe he felt so strongly about it. He was telling me whomever sold it to me just 'stole' money from me. Now realize, I have about a 50/50 split for between term/whole life so I feel pretty comfortable with both.

Anyway, this person who sold me the policy is a good friend of mine and I realized the pros/cons going into it. I'm just curious what the resident financial gurus of RZ think about Whole Life because when I Google Whole life it's staggering just how much many people are vehemently opposed to Whole Life compared to Term.

[Boston Red]

I prefer term because it is so cheap, and when the term (20 years) is up, I shouldn't need it so much anymore. I DO wish I had taken the option to extend it about 5 years when I still could have, because my youngest will still be 15 when the 20 year term ends. In retrospect, I would have liked to get him to 20.

Personally, I want to separate my insurance from my investments. But that's just me.

Also, the financial adviser who sold me the term life pushed whole life very hard. That tells you something.

[Redsfaithful]

The salesman does really well selling whole life and it's pushing a product that doesn't have your best interests in mind. Is that a scam? Maybe?

In general, you don't want to mix insurance and investments. There are some exceptions that don't apply to most people.

You'd have, what? Doubled up if you'd invested in stocks? More?

[Griffey012]

Insurance companies make good money on whole life products, term life is basically a loss leader/break even for them in hopes they can get you to buy additional products outside of term. With whole life the insurance company basically takes your premium and invests it in a bond portfolio, skims their profit off the top along with mortality and expense charges, and gives you what is left in terms of a return. You are pretty much always better off just buying term insurance and investing the difference on your own.

[JaxRed]

I can offer a slightly different view of insurance. From the back end... I'm almost 67. I have 3 policies. One term for $100K from MOAA (Military Officers Assc). I pay $38 a month. One term from a regular insurance company Primerica. $161 a month. Pays $110 for me, $85K on wife. One Whole Life from USAA for $100K. Pay $100 a month.

As you get old(er), one of the things you learn/have to deal with, is companies don't want to pay you to die, and once you turn 70 you're more likely to die. So, companies either terminate the policy or make sure it's so painful you kill it.

MOAA - Will terminate when I hit 70.
Primerica - I used to pay less than the $161, at some age they raised it. I think it used to be $100. But when I turn 74 the rate increases to $561 a month, and there will be more increases to make it so painful you quit.
USAA - I have whole life, with a cash value of almost $14,000. Last month for the first time, the cash value went down. So from here on, value will go down every month. Eventually they eat away at the entire cash value, and eventually it cancels anyway. I wonder whether I should have a talk with the wife about cancelling now, and just preserve the $14K.

So my take:

1. The goal of the insurance is to give your family the most protection and term does that. Go term. But make sure you can get it for a long time. I should have had more.

2. I agree with Boston. Keep your investments separate. But it looks like you are doing good job with that. The Roth is SUPER important.

[goreds2]

First of all, before getting life insurance realize (in my opinion) that you only need life insurance if someone is dependent on your income. A sales person will never tell you that. If no one depends on your income, why pay into a plan? If you feel you must leave something for your adult children, invest the money you would end up spending on life insurance.

Dave Ramsey's side on Whole vs Term Life:

Term life insurance
Term life insurance provides coverage for a specific amount of time. If you or your spouse passes away at any time during this term (usually 20–30 years), your beneficiaries will receive a payout from the term life insurance policy.

Term life insurance plans are much more affordable than whole life insurance plans. That’s because the term life policy has no cash value until you or your spouse passes away. In other words, it’s not worth anything unless one of you were to die during the course of the term. Then that’s when you receive money.

Of course, the hope here is you’ll never have to use your term life insurance policy at all—but if something does happen, at least you know your family will be taken care of. Cash value life insurance (whole life, universal and variable life)
A lot of people think cash value life insurance will help them retire wealthy. But the truth is, cash value life insurance is one of the worst financial options out there! Dave often calls it the payday lender of the middle class.

Cash value insurance lasts throughout your entire lifetime. You might think it’s a good thing to have life insurance coverage for that long, but here’s the truth: If you practice the principles we teach, you won’t need life insurance forever. Ultimately, you’ll be self-insured. Why? Because you’ll have zero debt, a full emergency fund, and a hefty amount of money in your investments.

And not to mention, the premiums on cash value life insurance are generally more expensive than term life insurance. Cash value life insurance costs more because it’s designed to do just that—build cash value. But keep in mind that a life insurance policy shouldn’t be an investment or money-making scheme—it’s simply meant to provide security, protection and peace of mind for your family should the unthinkable happen.

https://www.daveramsey.com/blog/the-...life-insurance

[BuckeyeRed27]

Whole Life is a terrible rip off. Insurance companies make staggering profits on them and the commission payouts advisors get are almost criminal. It has changed a bit with DOL rules, but I would never tell anyone to get Whole. I would strongly consider cashing out depending on if there are fees associated with doing that.

[15fan]

I went 25 year term when my daughter was born. That plus other instruments would have taken care of her (and my wife) if needed.

If you’re looking to fill a gap and provide protection for your family, make sure you also have something for both short and long term disability. That’s a blind spot in many family financial plans. It can be devastating if you find yourself in that situation and don’t have any coverage.

[SunDeck]

I had financial planner try to sell me life insurance for my kids. He's not my financial planner anymore. Life insurance is all about how much a dependent or spouse will need to get by if you die, in my opinion.

[Griffey012]

I had financial planner try to sell me life insurance for my kids. He's not my financial planner anymore. Life insurance is all about how much a dependent or spouse will need to get by if you die, in my opinion.

The other potential purpose for life insurance on a person (kid) would be to cover burial expenses and those related items. It could make sense in that case depending on a person's specific situation.

[paulrichjr]

I had financial planner try to sell me life insurance for my kids. He's not my financial planner anymore. Life insurance is all about how much a dependent or spouse will need to get by if you die, in my opinion.

Sortof disagree with this. I am a financial planner and there are certainly times it makes sense for a child. For example my wife became a diabetic at 19. She can get life insurance but at a much higher rate. One company that I use has a policy that you can get like $50,000 (for $18.00 per month) on a child with the option to buy many times more than that for inflation and every three years after reaching age 19. A 50K policy will lock a child into the guarantee of being able to buy over a million dollars worth without having to ever prove insurability (besides at first). I would literally make less than $100 off of that policy. Sorry but I don't need money bad enough to scam my clients over $100. Do I sell it to my clients? Almost never. I haven't sold one in probably 5 years. I probably haven't sold more than 20 policies on children in 26 years but I honestly think I should have sold it more often than I have.

As to the thing of why would anyone need life insurance on a kid...life insurance is for the living....if your child dies I can guarantee you that having some funds to give you the ability to take off of work and recover would be welcome. As I said I almost never recommend it but I don't think people are scamming others when they sell it for future insurability.

Now that being said some advisors sell insurance to fund kids college...that is in another league and I don't defend that one at all. A 529 plan makes a lot more sense to me.

[paulrichjr]

I can offer a slightly different view of insurance. From the back end... I'm almost 67. I have 3 policies. One term for $100K from MOAA (Military Officers Assc). I pay $38 a month. One term from a regular insurance company Primerica. $161 a month. Pays $110 for me, $85K on wife. One Whole Life from USAA for $100K. Pay $100 a month.

As you get old(er), one of the things you learn/have to deal with, is companies don't want to pay you to die, and once you turn 70 you're more likely to die. So, companies either terminate the policy or make sure it's so painful you kill it.

MOAA - Will terminate when I hit 70.
Primerica - I used to pay less than the $161, at some age they raised it. I think it used to be $100. But when I turn 74 the rate increases to $561 a month, and there will be more increases to make it so painful you quit.
USAA - I have whole life, with a cash value of almost $14,000. Last month for the first time, the cash value went down. So from here on, value will go down every month. Eventually they eat away at the entire cash value, and eventually it cancels anyway. I wonder whether I should have a talk with the wife about cancelling now, and just preserve the $14K.

So my take:

1. The goal of the insurance is to give your family the most protection and term does that. Go term. But make sure you can get it for a long time. I should have had more.

2. I agree with Boston. Keep your investments separate. But it looks like you are doing good job with that. The Roth is SUPER important.

You did not buy a whole life or the cash value wouldn't be going down. Whole life means it lasts for your entire life (whole life). You bought what is most likely a universal policy. The universal policy was hopefully never sold as something that would be whole life. It is supposed to be sold as an in between term and whole life. For example you could create a forty year (term like) policy with a universal life policy. It sounds like you bought something that will take you past what the term would go and provide a benefit a few more years after your term ran out. That can be important if you have a spouse that depends on you for social security for example. The cash value in the policy is what keeps that going longer than your term goes. If you do pass away before the cash value is exhausted (and your term has exhausted) your beneficiary would receive $100K. The term would give you $0. That is a big difference between getting $0 and $100K. Unfortunately when you bought that policy you might could have paid $25 more per month and it would have lasted 10 plus more years than it will now. Anyway like I said you didn't buy whole life or it wouldn't be crashing.

[paulrichjr]

Insurance companies make good money on whole life products, term life is basically a loss leader/break even for them in hopes they can get you to buy additional products outside of term. With whole life the insurance company basically takes your premium and invests it in a bond portfolio, skims their profit off the top along with mortality and expense charges, and gives you what is left in terms of a return. You are pretty much always better off just buying term insurance and investing the difference on your own.

Actually not totally accurate.

Yes whole life policies do invest in bond portfolios but whole life isn't really sold by many people anyway. I have been a financial planner for 26 years and have never sold one. Life insurance isn't much of my business but I do understand how it works. Life insurance is less than 5% of my total income mainly because I deal mostly with people with a lot of money and very little reason to buy life insurance...that being said here is some info that might clarify some of this.

Most better cash value policies are adjustable or universal and I wouldn't consider one that didn't allow you to earn stock market like returns. In other words you can invest the cash value in mutual fund like investments.

Next...this nonsense of cash value policies always being bad is just nonsense. If that were true then you wouldn't see the wealthy sticking vast sums of money into the cash value of policies. You see this is what most people don't know is that cash value life insurance is a kind of secret tax shelter exploited by the wealthy. My company (not me) recently sold a billionaire a policy that had a yearly premium in the millions. Why? Because cash value in life insurance grows tax free. The cost of life insurance is cheaper than the highest marginal tax rates. Let me repeat that...the cost of insurance is less than the top marginal tax rates so the wealthy are putting millions into life insurance policies to create huge ROTH IRA like investments.

If you pay for the Wall Street Journal you can read this article that I am linking but it basically talks about how the mega wealthy are using policies to create vast sums of tax free gains.

https://www.wsj.com/articles/SB10001...read#printMode
Shift to Wealthier Clientele Puts Life Insurers in a Bind


Anyway the law basically allows life insurance a unique benefit that no other investment offers...you can withdraw your initial deposits first and then access the gains tax free by borrowing the money out and just never paying the loan back. Interest rates on these policies are effectively 0% and so you are tapping the death benefit before you really die.

Should everyone own one of these? No. I personally think only those in very high tax brackets AND who are already maxing out other tax favored investments like 401K should only then look at cash value life insurance as an alternative to taxable investments. There is no doubt that if you are healthy, in a very high tax bracket, and fairly young you can blow away buy term invest the difference with certain kinds of life insurance policies...not whole life....ones created specifically for this purpose.

As far as the stuff about insurance companies and whole life vs term...I agree that companies make far more on whole life but only because the premiums are so much higher. The commission at least for anything that I can sell is exactly the same % on term as it is on whole life (cash value). The premium is just a lot higher on a cash value. That being said, the policies over the past 10 years have changed so much that the commissions structure just isn't anywhere near what it use to be. 30 years ago a $50,000 premium might make the agent over 50K the first year. Today that same 50K in some of these investment focused polices might be closer to a $10K commission. Still a lot yes but there isn't a lot of people wanting to buy 50K premium policies either.

[JaxRed]

You did not buy a whole life or the cash value wouldn't be going down. Whole life means it lasts for your entire life (whole life). You bought what is most likely a universal policy.

You are absolutely right. My bad.

[paulrichjr]

So when I was 26, (I'm 34 now) I bought a Whole Life insurance plan. At the time, I was single, wanted to diversify portfolio, and had some cash to spend. I was never comfortable putting money into the stock market (looking back, I should've started investing there. . .lol) so I wanted something more conservative. I already have a Roth, 401k from work, and even some liquidity in small amounts as an 'emergency fund.' Pretty much everything except specific stocks. Fast forward to present day where I still have my policy, a wife, and 2 kids. I have friends that were surprisingly hateful of Whole Life. It was brought up in a conversation one time and one of them was just downright negative about the whole thing and told me I needed to cash out immediately and just get term. I couldn't believe he felt so strongly about it. He was telling me whomever sold it to me just 'stole' money from me. Now realize, I have about a 50/50 split for between term/whole life so I feel pretty comfortable with both.

Anyway, this person who sold me the policy is a good friend of mine and I realized the pros/cons going into it. I'm just curious what the resident financial gurus of RZ think about Whole Life because when I Google Whole life it's staggering just how much many people are vehemently opposed to Whole Life compared to Term.

No idea what you are paying in premium but here is what I think. If your agent sold you partial whole life and partial term and didn't get you enough life insurance coverage to cover your need then shame on him. First and foremost make sure you buy enough life insurance that covers your need. Now you didn't appear to have much need there but at that time but I would say that getting you covered was a good move. People act like anyone can just go buy life insurance but that isn't the case. You have to be insurable and your agent sounded like they understood that and got you insured. Fast forward to today and it sounds like you might have a someone that depends on you.

Also you stated that you wanted to diversify and didn't want more money in the stock market at that time....now personally I would have tried to change your mind and wouldn't have sold you a whole life but I can see how someone might go to that for someone that wanted secure investments. Everyone says to you you should have bought term and invested the difference and while I mostly agree with that statement (I doubt you were maxing your 401K and ROTHs) you stated right here that you didn't want to "invest" more in those type of investments. A whole life policy would earn far more interest on a tax free basis than money market accounts have over that time period...so yes I can kind of understand the rationale. I wouldn't have done it personally but I get the reason for it.

As for dropping it now.....I can see both sides of that. You have already paid the commission. The money you are putting in is mostly now going straight into cash value so there isn't much cost there now. I think a 34 year old should be putting money into the stock market as much as they can so if it were me that is what I would be doing. Before I made that change you better believe I would have a very large 30 year term though that also gives you the right to convert it before the 30 years are up without having to prove insurability.