Whole Life Insurance

[Spencer Brown]

This is Spencer.

I've recently heard about a whole life insurance policy. I've been reading up on it and it seems to have some defiant benefits. It talks about using the savings for retirement, to finance purchases, etc.
Is this something smart to invest into? All of my neighbors have already bought into it.

Thanks

[jeffrey]

Don't do it. Your post brings up a couple of key points:

1. Insurance should not be an investment. Insurance is to protect yourself in the case of an unanticipated event. If you need life insurance, get a term policy and invest the savings elsewhere.

2. Do your homework and don't do what 'everyone else' is doing. Just because others are doing it (like your neighbors) should never be a reason to do it yourself. You should make decisions after doing the proper research and only after doing the proper research.

[nmboone]

Jeffrey's right!! Stay far far away from Whole and Universal Life Insurance policies. Stick to term. You'll be the smartest neighbor in your block!

[tmvijai]

I am motivated to ditto Jeff's comments since I follow the same rule. Term is the best option if you never have a life policty to start with. But after reading my 2 course for CFP cert(currently working on), whole has lot of advantages which many people are taking advantage. It shouldn't used as a sole investment vehicle. Here are few things about whole life,

For 5-7 years, all your premium payment of whole insurance goes to agent commission. If you terminate the policy during this period, you don't get back anything. You need to have a commitement to do whole life for 25-30 years to make it real worth it. Also there are different riders which complicates the whole life policy. So it is true whole life is not a good choice for both life insurance and investment but it is a good choice if you run out of other choices. There is also variable life insurance which combines whole life and self portfolio management to make another insurance cum investment vehicle. It was popular 2 years ago when stock where at high not anymore..

So if you don't have insurance at all, first risk management step is to get Term life to cover your bases next think about other options.

[arthurb999]

Term, Whole, and Universal life - in that order.

Whole life can have a lot of benefits to the insured including cash value, loan provision, and safe growth. Compare the return on a whole life policy to the market over the last decade and the life policy looks like a real smart place to stash money.

Couldn't you just invest in the same things the whole life invests and come out better becasue of lower expenses?

[disneysteve]

Couldn't you just invest in the same things the whole life invests and come out better becasue of lower expenses?

Of course you could, but no insurance salesmen will ever tell you that because they make a huge amount of money on the commissions on these policies.

The other point that is important to keep in mind is that amount of insurance you get for your money is way, way higher with term than with whole life dollar for dollar.

[feh]

Sounds very similar to a variable annuity, which are largely considered a ripoff (except for the person selling them).

[tmvijai]

All the whole, universal, variable are loaded with agent commissions as your premium and atleast for 7 years your investment go nowhere. I agree you can guy more insurance for your money in term than whole. I am with TERM as a sole insurance for anybody who don't have any insurance. but if you are done with all 401k, IRA's and investments, WHole or variable is considered as tax shelter with investment and insurance option embedded. It has loan option which can be used if you have a good surrender value.

I am not a sales man but I have done quite amount research and current working on my insurance course CFP. It gives lot of insight about insurances. I was a total opponent of whole but after reading, I found it not all that bad but it shouldn't be considered investment vehicle.

[disneysteve]

tmvijai - I think you are probably right but what you say applies to a very small percentage of Americans. Really, how many people are maxing out both their 401ks and their Roths, have adequate term life insurance, a 6-8 month liquid emergency fund, other short term savings for things like vacations and such, college funds for the kids, no consumer debt besides a mortgage and still have money they are looking to invest? Maybe 10% of the population and probably less than that. But to hear the insurance salesmen talk, you'd think everyone should have whole life insurance.

[snafu]

Your neighbors purchased whole life insurance because they just don't know any better! They've likely made other poor financial decisions.

[Bimmer]

This is Spencer.

I've recently heard about a whole life insurance policy. I've been reading up on it and it seems to have some defiant benefits. It talks about using the savings for retirement, to finance purchases, etc.
Is this something smart to invest into? All of my neighbors have already bought into it.

Thanks

Do these same neighbors have hefty car loans and pay minimums on credit card balances? Term is better anyway, but certainly do not get a whole life policy because its the "cool" thing to do in the neighborhood!

[Runaway Finances]

In my 30 years being in the financial services business (including 17 years in the insurance business, left the business in 1996) I have never met a single person who bought Term and truly invested the difference. I've never met someone who said "and here is my investment account that I have built up from the savings between the Term and whole life premiums". On the other hand, I have met MANY people who reach retirement and the only savings they have are their retirement plans and the cash value of life insurance. The books may say "term and invest the difference" is better, but that is not reality. Come on guys, how many of you truly set up a separate account and invested the difference. Most people buy life insurance because the don't have enough savings to provide for their families the way they want. This is usually when they have kids and have a terrible time saving money.

Most people buy Term because that is all they can afford. And, if that is all you can afford, then by all means, by Term. When buying insurance, you should make 3 decisions: 1) How much insurance do you need, 2) how long do you need the insurance, and 3) how much is your budget for life insurance. Those were the questions I would ask before I would come up with a recommendation for what type of insurance to place a client in. Many times, their budget dictated that Term was all they could afford to buy, even though it wasn't always the best product to buy.

Never buy life insurance as a "retirement funding vehicle". Buy it because you need life insurance. The cash value can be used like an emergency fund, but its main purpose should be for life insurance.

I've done the numbers on buy Term invest the difference vs. Whole Life and there is a cross over point. The rate of return in each determines that. If you invested the difference in the stock market over the last 10 years, then someone with a non-variable whole life policy most likely smoked you.

I've said this in another thread, but if you need to keep your term policy after the initial guarantee period, then you better get ready to pucker as the premium skyrockets unless you are healthy and can reapply. It doesn't take much to make you uninsurable, by the way.

[disneysteve]

In my 30 years being in the financial services business (including 17 years in the insurance business, left the business in 1996) I have never met a single person who bought Term and truly invested the difference.

I certainly have. In fact, we started investing first even before we bought insurance (because we didn't need insurance yet at that point). We set up an automatic monthly transfer into a mutual fund, gradually increased the monthly amount and later added additional investments, all the while keeping our cheap term coverage. In fact, I've replaced our term policies twice over the years as our personal savings grew and our debt diminished, reducing the amount of coverage we needed and because term rates came down so much.

And that touches on another point. I don't need whole life insurance because there will come a point when I don't need insurance at all. Once the house is paid off, my daughter is out on her own and our investments are sufficient to support my wife were I to die, the insurance can go. I've already cut our coverage twice and I expect to cut it again in the near future. The need for life insurance should gradually fade as you get older. Why buy "whole life" coverage if you won't need it for your whole life?

[tmvijai]

I can also proudly say, I have also invested the difference and continuing to do so. It all depends on each individual practice who don't want to throw the money into drain.

[creditcardfree]

Technically, no I haven't invested the difference. In fact, I don't know what the difference is because I haven't priced a whole life insurance. However, we save over 15% of our gross income. I can imagine that is more than the difference between whole life insurance and term insurance.