If you want to protect your family against your unexpected death, you are usually better off with term life insurance rather than whole life. Term usually provides the most protection for your family at the most reasonable cost.
Whole life agents often take issue with this and I can understand. On my site, I have compared the two types of policies several times to demonstrate that the returns don’t usually justify the costs of whole life. But despite all the evidence to the contrary, many whole life agents claim that whole life is still better than term. Why?
Most of these agents are good people. They aren’t all slick sales people just trying to empty your pockets into their own. Many of them believe what they are doing is noble.
Well….noble or not, their arguments are misguided in my opinion.
I thought I’d take a moment to share their arguments with you now. This way you will be better equipped to ward off ill-advised sales pitches. At the end of the day, the pitch for whole life is based on one of two arguments in my experience.
1. “Clients benefit by having guaranteed investment returns. This beats the stock market because there is no risk with whole life.”
There is some truth to this argument….but not enough to warrant you to take action. It’s true that a portion of the money you plop down for a whole life policy grows in an investment account. And that money grows for you over the years. At some point, you’ll be able to access some of that cash tax-free. But how much does it grow?
Every whole life policy spells out a guaranteed return and an expected return. Since these policies extrapolate values out over many decades, I always play it safe and consider the guaranteed returns rather than anything else. If you want the guarantees of life insurance let’s look at what they guarantee.
Depending on when you buy a policy, that guaranteed rate might be higher or lower. I looked at a policy recently and discovered that the guaranteed rate of return was 2 percent over the next 30 or 40 years.
In fairness, if you look at the last 10 or 12 years, 2 percent wasn’t so bad. But would you sign up for an investment that guarantees 2 percent for the next 30 or 40 years? Probably not. That 2 percent is guaranteed of course and alternative investments like the stock market are not guaranteed. But if you are thinking long-term, it’s reasonable to assume that the non-guaranteed alternatives like the market are going to work out far better than life insurance.
2. “Clients need whole life insurance so they can spend most of their assets down and still leave something to the kids.”
This argument would be funny if it weren’t so dangerous. Let’s take this apart so we can really understand the weak foundation that whole life is built on.
If you buy whole life and make all your payments you will indeed have life insurance in place when you die. That means your heirs or anyone you choose will inherit the life insurance benefits when you are gone. So if the only thing stopping you from spending all your assets now is that you want to be certain that your heirs will have money when you die, this argument holds water.
But chances are you aren’t spending down your assets for other reasons. Namely, you don’t want to run out of money while you are alive.
Some people buy life insurance to replace assets…. but not many. Most people buy life insurance in order to protect their family. Life insurance is usually meant to replace income–not assets. And $100 buys a heck of a lot more term life insurance than whole life. In many cases, you can buy 10 times as much.
If you are young when you buy life insurance you want the most protection you can get for the least amount of premium because protection is upper most in your mind. But if you buy a whole life policy, the premiums are so expensive that you probably won’t be able to get all the coverage you need. You might have a few bucks to throw your kids way if you live a very long time. But if you die prematurely you won’t have the coverage you need and your family will be left out in the cold. Which is more important?
Again, (as far as I know) nobody knows when they are going to pass away. It’s not smart to spend down all your money. You already know that. And nobody knows how much it’s going to cost to live in their advanced years. As a result people tend to keep as much cushion as possible.
People who sell whole life insurance sometimes use poor arguments when they try to sell you these policies. The best way to make sure you don’t get duped into buying the wrong insurance policy is to be crystal clear about what your objectives are before you do anything. If you are trying to protect your family, term insurance is the way to go. Don’t let someone else tell you what should be important. You are smart enough to figure that out for yourself.
Whole life does serve a purpose but only a handful of people really benefit by owning it. Everyone else who buys it sooner or later figures out what a lousy investment this really is. Where do you stand on the issue of whole life insurance?
Neal Frankle recently wrote an in depth review of social lending company Prosper which is very much worth reading.