There are two diametrically opposed schools of thought out there. One believes Whole Life is the ultimate protection and bullet-proof investment tool. The other thinks Whole Life is a scam and Term Life is the only way to go. Well I happen to have an opinion on that (as I often do!) and since I spent some time working for both MetLife and New York Life as a registered investment rep, I will drop some knowledge on the topic, minus the hype.
First of all, let’s talk about the 3 main characteristics that identify both:
Period of Coverage: Whole, or Permanent, life covers you for your WHOLE LIFE as long as you keep paying the premiums. Term life only covers you for the term (or, time period) stated in the policy. That can range from 5 to 30 years typically. Some policies are renewable, but at a higher rate than initially paid. Annual renewable term will automatically renew each year premiums are paid, regardless of health but rates will increase each year up to a maximum age limit, while the face value of the policy will remain the same. That can get pretty expensive. At a particular age limit insurance company policies or state laws will prevent you from further renewals.
Cost of Premiums: Typically, a whole life premium will be higher than a term policy for the same face value, especially in the initial stages, but you will always pay the same amount for as long as you live. Term policies are much lower than whole life because they only cover you for a limited time, so the insurance company has a much lower risk. The flip side is, the older you get, the higher term premiums will climb until they become prohibitive.
Cash Value: A portion of your whole life policy goes into an investment instrument and increases in cash value over time. You may use this cash in different ways, including borrowing against it or using it to pay the premium for your policy, in effect, causing it to become self-sustaining. In the vast majority of cases, term policies have no cash growth.
Now, please allow me to debunk the hype about both. The term lovers will tell you that whole life is a rip-off because the premiums are very high and you can get the same amount of coverage with term for a fraction of the cost and you can invest the rest in the market. This is true. But what they conveniently leave out is the risk involved in investing on your own and the potential tax liabilities of said investments.
They also don’t tell you that many people drain their investments in the run-up to death with the medical expenses that come along with a chronic and terminal illness. So what good are those investments going to do you if you spend them all on your medical bills and leave your family destitute and without the means to even put you in the ground? The death benefit from life insurance is untaxable and unattachable. That means neither the government nor your creditors has any claim on it.
They also ignore the fact that at some point your term will expire and if it does and is not renewable without proof of health, you can find yourself up that brown creek without a paddle if you are in ill health, such as having diabetes, cancer or heart disease. The company can at that point deem you “an uninsurable risk” and deny you a new policy. And even if they do insure you, it will be at a rate so high your eyes will bleed! You never have to worry about that with whole life. As long as you pay the premium, you’re good for as long as you live.
The term lovers will also tell you that the rate of return in a whole life policy on the investment portion is weak. I agree, it is relatively paltry. But it is there nonetheless and it is safe. I’ll give you an example. One of my clients back in the day who had a whole life policy needed to borrow cash to expand his business. This was during the Great Recession when banks were not loaning any money to small businesses like his. He turned to the $40,000 in cash value of his whole life policy. It was there when he needed it and it was his to take without filling out a bunch of income verification and credit check paperwork.
One more thing about my client and others like him. While the investment accounts of others around them were dropping like stones, his was safe inside his policy, due to the very nature of the laws governing insurance policies. So he wasn’t ripping his shirt apart and throwing ashes into the air like the other people who were freaking out about the slashed value of their accounts.
While all that is true, let me make one thing very clear. Insurance is just that, insurance. It should not be viewed as an investment. Investments are investments. Insurance is insurance. One is intended to grow your money. The other is intended to protect your life. Don’t mix the two purposes up and don’t let someone try to convince you otherwise. Some unscrupulous insurance agents will try to sell you on the idea of overpaying on whole life for the investment advantages. There are no advantages when you abuse whole life this way. So give the boot to anyone who tries to sell you that bag of goods.
Term serves a good purpose. It provides cheap coverage in your younger years when you typically have greater responsibilities such as a mortgage or a growing family to provide for financially should you die. You can lessen the amount you carry as you grow older to reflect your lessening financial liabilities.
And some term policies are convertible. Meaning, you can convert a portion to whole life with or without proof of health, depending on your individual terms within the policy. Usually this has to be done within a certain time frame or you forfeit that right.
What I recommend is that you use a wise mix of both. Carry a respectable amount of whole life for what you feel you will need through to your later years. In addition, carry term policies in the amounts you feel you will need for the more immediate future and over the length of the term.
When you use them both as they are intended, they will serve you well. So don’t get caught up in the hype. Be an educated consumer and make your own wise decisions on what kind and how much life insurance you will need. Now that’s Maxing Out your money! For more helpful tips like these, subscribe to The Max Money Mind email list and get regular nuggets of financial wisdom deposited directly to your inbox. Good health to you!