Term vs. whole life?

[retire_asap]

I have heard several times that it's best to buy term life insurance rather than whole life or "cash value" life insurance and invest the difference.

I am under 30 years old, and currently own a whole life policy which I started a few years ago. I decided to go with that instead of term because the rep who sold it to me showed me illustrations where I could borrow back the cash value and use it as part of my retirement income. Seemed to make sense at the time. His illustration showed that it came out about even against an index fund @ 8%/term life combo.

Anyone have any thoughts, or any specific reasons that they would or wouldn't go with term instead of the whole life? Is there really a huge difference when it comes to these two options and ER planning?

There are a lot of resources, but most of what I have found online are sponsored by insurance companies so I am a bit skeptical of that info.

THANK YOU!

 

[Cut-Throat]

His illustration showed that it came out about even against an index fund @ 8%/term life combo.

Anyone have any thoughts, or any specific reasons that they would or wouldn't go with term instead of the whole life? Is there really a huge difference when it comes to these two options and ER planning?

A very good salesman indeed! - There is always a lot of commission with Whole Life.

There is a snake in the woodpile with his example. Your mission is to find it. Every investment expert I've heard of recommends Term Life.

Since he is so interested in selling it, there has to be commission in there that is very expensive.

 

[Bob_Smith]

ASAP, go with term life. A couple of reasons:

1) You can afford to buy far more coverage. If you're young you need to protect your family in the event you die. This means you need a LARGE death benefit - that's the only reason to buy life insurance.

2) Insurance companies are always higher cost providers of investments. You can do better investing yourself.

3) Why would you want to "borrow" your cash? It's your money! If you invest yourself, you have access to your money anytime you want.

Buy term and invest yourself - never mix insurance and investments. Then drop your term insurance when you no longer need it (when you have enough to live off your assets).

 

[Bob_Smith]

I posted above without seeing Cut-throat's post - I was writing while he was posting. That happens to me all the time! Anyway, I agree 100% with Cut-Throat. I've never seen anyone but an insurance agent recommend whole life.

 

[brewer12345]

I would agree that for basic protection you can't do better than term life. However, ASAP, now that you have incurred the pain that comes up front with buying one of these policies, you probably would not come out ahead by surrendering the policy and taking a term policy instead. Most of the pain is incurred in the first year as the agent gets paid. What company is the policy with?

 

[bow-tie]

I wonder if ASAP could do a 1035 exchange without any penalty... a lot of factors involved, but maybe something to look into.

 

[ats5g]

ASAP,

Peter Katt, a fee-only life insurance advisor has written some articles on life insurance. There is one called

Permanent Life: Clearing the Fog That Surrounds Policy Cash Values

that you might be interested in.

IMHO, the type of insurance you get can depend heavily on the type of need you're insuring, or risk you're offseting. For example, do you need insurance for the rest of your life? If yes, the perhaps permanent life insurance may be the best way to go. Or do you need life insurance for only X number of years until the kids get out of school, until you've got enough assets/money to self insure?

Did this rep actually calculate how much life insurance you actually need?

I really enjoyed "Insurance for Dummies" as a good starter for the basics.

Regarding the illustration of the life insurance rep, did he actually explain to you what the cash value of the life insurance is. Isn't it the premiums you pay, returned to you, that the insurance company doesn't need? Aren't the cash value "earnings" based on the profitability of the insurance company? What is the minimum accrual rate, etc? Did he also tell you "Get insurance while you're young b/c it's cheaper?" Did the index returns get taxed at income rates, not LT cap gains rates, etc?

- Alec

 

[retire_asap]

Thanks again, everyone.

The policy is with Principal Financial. The rep did calculate the amount of life insurance I need.

The way it was pitched is that by the time I no longer need the insurance, I'd be able to get the cash out of it. I have several other savings vehicles which are maxed out, so this is NOT my primary retirement savings method. Seemed to be a decent way to have insurance coverage while I needed it, and have the cash later on.

I will be reviewing the whole thing with my rep very soon to be sure this still makes sense. As mentioned, I may have already taken most of the beating on this and it may make sense to stay put.

THANKS.

 

[brewer12345]

Since it is with Principal, it may well be a universal life policy rather than a whole life policy. If so, the best way to get value may be to dump in excess premiums, most of which goes directly to your cash value and earns interest. Not a bad way to get your fixed income exposure, presuming you actually need the associated life insurance coverage. Just make sure that the crediting rate is competitive. Principal is a solid company.

 

[MooreBonds]

One other thing to keep in mind with WL is that your premiums are NOT guaranteed.

Most Term policies can be purchased (and many are only quoted this way) such that the premiums are locked in for the life of the term. However, when your agent shows you the illustration, you have to pay close attention to the fact that there are two columns:

Guaranteed
Current

The guaranteed column is what the insurance company would ask you for in the 'worst case' scenario....the 'current' is what would happen if the current environment continued for the life of the policy.

There are many insurance companies that are struggling with maintaining their dividends and interest rates - and some have even dropped them substantially over the past few years with the current interest rate environment. Keep in mind that the company could easily (if they haven't already) drop the interest rate they're crediting your account and/or alter the dividend payout. That would result in you having to pony up MORE money each year just to keep the policy in-force (if not get a notice of a large one-time payment just to keep it in force as well). Keep tabs on your current policy's cash value, etc., and compare it to the original illustration the agent gave you (you DO still have that, don't you? ).

I'm currently shopping around for term AND whole life policies, and am doing some number crunching to see the differenes. When I first got some quotes last year (got tied up with a few personal items and never got around to doing anything), it seemed like I would have to earn more than 5% AFTER-TAX return with a Term Policy, rather than overpaying my WL policy and letting the overpayments earn interest tax-free (NOTE: If your total premium payments are $10,000, you can let it build up and earn interest in the policy, then withdraw up to $10,000 without paying taxes. In essence, the overpayments earn interest that is never taxed, which can then be used to pay future premiums).

However, with a recent change in the asset levels that Term Life Insurance companies have to have, the term rates have dropped considerably lately, so it might make financial sense to look at a term policy locked in for 20 or 30 years (a great website that gives free instant term quotes from a sound company is zurichdirect.com)