The Age Old Debate – Should You Buy Term or Permanent Life Insurance. An educated opinion from someone who doesn’t sell it but used to have an insurance license.
During single life you were probably financially dependent on yourself. Now, as a married couple, you and your spouse are financially INTERDEPENDENT. Usually where someone is financially dependent on you, you have a life insurance need. That’s even more true when your dependents are kids, or other minors who really cannot take care of themselves.
In this article we are going to review two types of insurance that are often solicited by agents working with new parents: (1) term life insurance and (2) whole life insurance.
I used to sell life insurance but finally realized it wasn’t my passion and I really didn’t want anything to do with commissioned products. I preferred just getting paid for my advice whether a sale happened or not so that the conflict of interest with my advice was removed.
Still, the bigger problem I have with the life insurance industry is that professional agents really can’t make a decent living selling term life insurance – the product I believe is most suitable for the lion’s share of people who have a life insurance need. They have to sell permanent life insurance (whole or universal) to make any notable money.
Let’s start with the difference between the two.
Term life insurance is coverage which lasts for a specific term of years, usually 10, 20, or 30 years in total. There is no cash value and you get nothing in return (in terms of benefits) if you outlive your term period of coverage.
Whole life insurance is permanent. In other words, if you make your scheduled premiums in a timely manner, you have insurance for life. Plus, you tend to get cash value growth such that you will have some money you can walk away with if you cancel the policy in the future.
Just reading this, you might say, why on earth would anyone buy term life insurance!? Well, the reason is, it’s usually only about 10% as expensive as a whole life policy.
What’s our common recommendation? Buy term insurance and invest the premium savings vs whole life in the stock, bond, and real estate markets. Usually we recommend a 30 year term policy for anyone under 45 years old. This will cover them through their traditional working a years, at the end of which, you probably won’t have employment income to replace with life insurance anyway. Further, after 30 years, those premium savings, if invested, will be substantial.
We espouse this plan precisely because of its flexibility. Whole life insurance, being 8-10X more expensive, works well as a savings vehicle, but usually you need to keep the policy in force for 10-15 years before you start to see appealing results in terms of cash value growth/return. The questions I always ask:
· While you can afford those premiums now, would you still be able to if get laid off or take a pay-cut?
· What if you want to start your own business? Will making massive life insurance premium payments (as opposed to far more affordable term life payments) be justified if the alternative is investing in yourself and your business instead? Probably not.
· What if want to re-direct your savings to a different vehicle? For instance, investing in a rental real estate property or exercising stock options from your employer. Would you still be able to do this if you are dumping all that money in the whole policy?
· How many people do you know who got wealthy buying whole life insurance as their primary savings vehicle? I’ve met with hundreds of clients over my 10 year finance career and I’ll give you my answer to that question… none, zip, nada. As an alternative, how many people do you know who built immense wealth investing in real estate and the stock market?
In conclusion, the answer to the question, “Should I buy whole life or term life insurance?” is, like so many other things in finance, “it depends”. My issue is that if we are being honest about the pros and cons from an objective point of view, many people who are sold expensive permanent life insurance products by an insurance agent would elect term life for its flexibility and cost effectiveness if they had all the information.
Before you make the purchase decision, talk to someone other than the individual selling you the product. Second opinions are valuable and much cheaper to get vs buying a permanent life insurance policy and regretting it a year or two later if your financial circumstances change.
