What is the benefit of converting a Term Life policy to Whole Life or some other type of life insurance policy? I’ve always been told to get a Term Life policy and the rest were bad “investments”.
Term Life costs less than Whole Life and makes sense if you take the amount you save and invest it yourself. Whole Life may not give as good a return as other investments but you don’t need to do any extra financial work.
I am not a financial consultant and do not know your age, income, or personal fiscal discipline.
Thanks for the comments. So the Whole Life is a way to force people to save that otherwise might not be able to do so if they have easy access to the money? Or they aren’t skilled at handling investments?
Forgive me for posting before coffee, but most Whole Life policies develop a cash value. It’s like a bank account with a terrible rate of return, but it provides more flexibility for e.g. borrowing.
That said, I have only term insurance. The ups of whole life aren’t very big for the extra cost, at least in my world.
That’s a reasonable way to think of it, yes.
Pretty much.
Suppose you have a growing family and feel you need $1,000,000 worth of life insurance. You probably cannot afford a whole life policy in that amount, but you might be able to afford a term policy. It is not simply a question of investing the money saved on the premium, but rather of affording the insurance.
One disadvantage of term–unless it is guaranteed renewable–is that you might become uninsurable, just when you most need it. I became uninsurable at an early age and hung on to every policy I could get. Now, more than 50 years later, with a guaranteed pension (60% of which will pass to my wife), a fully paid house and other assets I need very little insurance and just have the $30K term policy from my former employer that renews automatically.
The point is that needs change throughout your life and you should adjust to them.
This Term policy is renewable for 15 years, well, it is renewable for 42 years but after 15 years the premiums jump up over 14 times as much, and increase each year. The thought behind getting Term was to have coverage through retirement age of 68 years old. By then we expect to begin living on savings and a pension, and then take social security at age 70.
So if Whole is really about being more expensive to invest the money for you with weak returns, it sounds like we are better off investing the money ourselves as we have been and managing it like we have.
For the vast majority of people looking to buy life insurance, the best advice is, “Buy term life insurance, and stay away from whole life and universal life.”
This. The main benefit of whole life over term life is to the insurance agent who sells it to you. Comissions are high because the product is extremely profitable to the insurer. If it’s really good for them, it’s probably not that good for you.
The purpose of life insurance is to help your dependents cope with the loss of income caused by your death. I’ve had term life since our older child was born, and will probably drop it when our younger one graduates from college around 4 years from now (my wife has enough income that my retirement savings will obviate the need for insurance on me). I got group term life through a professional organization (IEEE). Until I turned 50, it was extremely cheap (about $800/year, including the required membership fee in IEEE, for $500K on both me and my wife). It’s more than doubled since I hit 50, but still isn’t a big burden, and, like I said, we’ll only be using it for another 4 years or so.
For savings/investment, I use my 401(k) and IRAs.
Term usually has a time limit that you can maintain it for, and when you get older new policies will get more expensive. A Whole Life plan can be set up for a lifetime. I’m not saying that’s a comprehensive look at the issue, just overall for any plans consider your future insurance needs. Life insurance is give you peace of mind about your dependents, you can’t really do a cost/benefit analysis for just yourself based on the payout because you get no benefit once you’re dead, but a Whole Life policy accumulates value that you can cash in later if you have the need.
Absolutely. I have very inexpensive term insurance at work. When I retire later this year not having life insurance is last on my list of worries, since I’ve invested my money and we have plenty for my wife to live on (me too.)
One could even say that having whole life these days is an indicator of being bad at investing.
Another problem is that whole life does not keep up with inflation. My father-in-law is 100, and has a paid off whole life policy where the cashout benefit is equal to the death benefit. It isn’t a lot for having been invested about 70 years. He would have done a lot better putting that money in the market.
I think 50 years ago lots of insurance salesmen got people young. My wife has a whole life policy also, bought ages ago, which also isn’t worth much.
What term life fan-boys conveniently overlook is that virtually nobody actually “invests the difference.” As one acquaintance says, “They buy term and buy pizza.”
You’re thinking of the old whole life. The new whole life can easily pay 5-7%.
That’s actually the worst possible advice, unless somebody truly cannot afford whole life. Approximately 98% of people who have a term life policy outlive the policy.
That’s exactly what you want. I have a term policy that will cover me until I don’t earn income anymore, after which point there is really no reason to have life insurance.
For a married couple of modest but non-zero savings, it’s pretty easy to discover at age 70 that it takes both SS checks to pay for a roof and groceries & medical expenses. If one person dies the expenses go down about 25-30% but the income goes down by 30-50-80% depending on their lifetime earnings & who goes first. That’s a hard lesson for a grieving widow(er) to swallow.
Assuming your spouse won’t need your life insurance payout after you retire is not necessarily good thinking. It might be fine. Or it might not. Depends on how fat your other retirement programs are and what you think will happen to medical costs between now and then.
Whole Life is a sucker’s bet.
All life insurance is a bet. You are betting that you will die. The insurance company is betting that you will live. If you win (that is, die), you collect. If you don’t die, the insurance company keeps your money.
Now, with term life, either one of you (you or the insurance company) might win. So they only have to collect enough of your money in premiums for those clients who happen to croak during the term.
But, with whole life, what are the odds that you won’t die? ZERO! Of course you are going to die. So of course the insurance company will have to pay up. So OF COURSE they have to collect enough money from EVERY SINGLE ONE of their whole life customers to pay them off. They need to collect TONS of your money to stay in business. It becomes nothing more than a savings account from your perspective.
Whole life is for suckers.
Whole life is a bad place to put your money. Yes it does gain cash value but not much.
But there are good plans out there. But you have to have a good agent looking out for you and not themselves.
I retired 2 years ago. I made the choice of having a 75% survivors benefit for my wife. She is about 5 years younger than me so will probably out live me. This benefit is costing me about $1025 a month. Before retiring I checked into getting life insurance.
I swaged that I would need enough insurance to replace my retirement check for 20 years. The amount would be $550,000. I contacted an agent and explained what I wanted to do.
His plan was for 15 year term for $120,000 and a ILU(?) plan for $$250,000. Because the payments would be paid out as an annuity to my wife if I died it would last 20 years at my retirement check level. At the end of 15 years drop the term plan and the other plan would have enough value to be self funding so we would not have to continue making payments giving us a raise in spendable money. The cost was going to be around $1,000 to $1,025 a month. But I failed the medical so we did not go that route.
The advantage of the insurance method.
Other than income taxes on the insurance costs, the cost to us would be about the same. When my wife and I both pass away the retirement payments stop. With the insurance if my wife did not out live by 20 years some or all of the insurance money would be left for my kids to inherit.
I am being taxed on my retirement check and my wife will also be taxed when I pass. But my wife would not be taxed on the insurance.
I wish someone had come to me earlier in life with this plan. the insurance would hve cost less and I may have passed the medical.
So if you have a retirement plan with survivor’s benefits, check out how much the benefit will cost you and compare it to getting a proper insurance plan in place.
So that must be the big selling point for Whole Life over Term Life, that the insured can always be covered.
Nice to meet you, I’m nobody. We carry Term Life, still invest 20% of our gross in retirement plus non-retirement short-term savings. The purpose to us for having Term Life wasn’t about cost, it was about the reason we got it. In place of income if one of us doesn’t make it till retirement age. At retirement age we plan to celebrate by canceling the Term Life.
I realize there are people who can’t save and invest money. They are entirely focused on consumption and material things. Some don’t understand or care to understand about money. If you give them as a gift the book, the Automatic Millionaire they won’t read it. But that isn’t everyone.
This is a very good point, and I was rather self-centric in my post. My retirement planning does not consider SS income but for many people it is essential.
My point is that life insurance is a way to buy the avoidance of catastrophic loss of income. If your death would not result in a loss of income needed to support dependents, then you don’t need life insurance.
If you view life insurance as an investment or a way to make your heirs rich after you die, then you are betting against the insurance company and the game is tilted towards the house.