I field a high number of calls asking about whether people should buy term insurance, universal life or whole life, and in some cases they will have heard of, and ask about return of premium term insurance.
Now is not the time to hold back my feelings on this, so I am going to lay out the arguments I hear for not buying term and then you get to find out how I really feel.
1. But if I buy term and don’t die I will have wasted all that money…..
2. I want something that builds cash value so I can borrow against it……
3. What if I get to the end of my term and still need insurance……
I’m just going to address these questions in the most common scenario. Husband and father providing life insurance for the benefit of wife and children. For the average person in this scenario, your life insurance needs are not permanent. If you are in your 30’s or 40’s, married with children, most of your needs for life insurance will be gone by the time you are 65 or 70. Before you scream, I did say most, not all.
Unless you have a child that will be dependent on you for life due to a physical or mental disability, you have absolutely no obligation to carry life insurance for them past the point where they go out on their own. “But I’d like to leave them something!” Good! When they leave home, drop the insurance and start contributing to a retirement fund for them. In fact, if you bought term insurance rather than the other types you would have had enough money left over to be putting money away for them all along.
Sorry, I got emotionally off track. Wasted all that money?? You protected your family against disaster for all those years and that was a waste of money? You did it as inexpensively as it can be done and it was a waste? Try this for an exercise. Get gut honest with yourself and write down what you spend in a month that is just “blow money”. Money you spent that didn’t do anything but satisfy your desire at the moment. Beer, cigarettes, satellite TV, pay TV, new clothes when you have plenty already, sodas, snacks, eating out rather than cooking meals. Add all that up for a month and in most cases it will come to more than it would cost to very adequately insure yourself with a 30 or 35 year term policy.
But you say you don’t want to give all that stuff up? Do you get your money back when you’re through blowing it? Did it protect your family?
You want to buy whole life insurance so you can borrow against the cash value. Just two quick points. The cash value comes from you. Whole life is not a magic money machine. And, you have to pay it back or your policy will either collapse or the death benefit will be smaller than you intended. Ok, three points. You can’t afford to adequately insure yourself with whole life insurance. So, you want to put your family at risk by underinsuring so that you can borrow against the policy and possibly make the death benefit even smaller or nothing at all?
If you get to the end of your term and still need insurance, it will likely be a small amount having outlived children, jobs and mortgages. Once you are past the big three of life insurance needs, a small universal life policy should suffice, and you can convert that from your term policy without evidence of insurability.
Bottom line. Talk it through. Think it through. Don’t throw money away.
I cannot agree with you more.
You are right on target about the use and value of term life insurance.
It is not a waste of money if you outlive the policy, because term life insurance is used to provide much needed financial protection for your loved ones. It is not an investment.
Every situation is unique.
Here’s the one question I have for you. For just a moment forget about whole vs. term and focus on how long to have coverage.
Why would you not have coverage until you die?
The reality is that you do have life insurance til the day you die, even if you dropped your term years ago. Why? Take your assets at retirement and ask yourself why you can’t spend every penny?
Because you have no idea when you’re going to die. So the common solution is live off the interest, keep your nest egg intact, and enjoy retirement. So what happens when you die?
You pass on your nest egg. Your nest egg became life insurance. So you never got rid of life insurance, you simply told the life insurance company, who is really good at insuring things “No Thanks, I am designating myself and my family as the new life insurance company”
If you begin to get this, and you probably won’t at first because of the ingrained marketing, you will see that having life insurance until you die is the most effective.
So term to age 100 or whole life, which is more cost effective? If you don’t know the answer to this last question, it’s crucial you let go off all your beliefs about what you hear and learn more.
Well Joe,
I’ve read your comments three times now and I can honestly say I don’t think we disagree. For 95% or more of all needs, term insurance does the job you need it to. It gets you past the point where there is no nest egg and you can safely “self insure”.
Your question is “how long to have coverage”? I believe it’s important to carry true life insurance as long as you need it. If your family would be worse off upon your death without life insurance, you should carry it. If it only adds to already adequate assets, you shouldn’t.
Are there permanent needs. Absolutely yes. Life insurance expressly for the purpose of paying estate taxes makes sense and should be permanent. In this case, using assets as life insurance is a mistake unless you have an overpowering need to help bail out the government with your own money instead of life insurance proceeds.
Thanks for you thoughts. Ed