Ryan Frailich, CFP®
You Don't Need Whole Life Insurance
I’ve got a proposition for you. It’s time you reconsider your current car insurance, and think about a Whole Car policy. With this policy, you’ll build cash savings within the policy, which you can use in the future. And the money will be invested, with a guaranteed rate of return, so your money can grow if you don’t make any claims. I mean, think about it. It’d be an awful waste of money if you pay your car insurance all these years and never make a claim. Right now, you just lose that money. But with this Whole Car policy, you could use some of those contributions to actually purchase your next car, or take a loan from the accumulated earnings within the policy if you ever need it. If you don’t make a claim for long enough, you could even withdraw some of the money, tax-free, to pay for other things you have going on. Sound good?
Okay, what are you paying now for your auto insurance? Oh, you’re in Louisiana, so you’re paying $130/month already for your car insurance? Okay. If you switch to this Whole Car insurance policy, it’ll be…..
$1,040 per month.
Okay, you’re no longer interested. Good.
What I described above doesn’t exist, and there’s good reason that “whole car” insurance doesn’t exist. It would be an absurdly complex product that few people understand. Yet, Whole Life Insurance does exist, and the scenario I laid out above is basically how the sales pitch for that product goes.
Whole life insurance is a type of life insurance that guarantees you a rate of return on your investment. It also builds an accumulated value over time, and there are provisions for you to access that money when you need it. It’s often sold as the be all and end all policy, capable of solving basically every potential problem you could have. But all those bells and whistles come at an astronomical cost, and for 99.5% of people, there’s no good reason to buy one of these things.
Comparing Whole Life and Term Life Costs
I met with some new clients earlier this year, a couple in their early 30’s. The husband had purchased a whole life policy, with the benefit being $400,000 if he passed away. The monthly cost was $287, or $3,444 per year.
I recommended looking into a 30 year term life policy, also for $400,000. Using the site www.term4sale.com, we can see that buying term life insurance for an early 30’s man in above average health costs about $36/month.
That means the whole life policy cost 8x as much as the term life policy. This is not an outlier case; whole life insurance often costs 8-12x as much as a term policy for the same amount.
Who needs Life Insurance, and Why Should I get Term Life?
First off, let’s establish that if someone else is relying on your income to maintain their lifestyle, then you probably need life insurance. If there is no one else relying on your income, you don’t need life insurance.
Are you expecting a baby, or, already a parent? You should have life insurance.
Are you single, no kids, and renting? You don’t need life insurance (other than whatever your employer provides, if you get some for free through work.)
Are you a young couple who recently bought a house? It’s likely you need life insurance. You get insurance so that, God forbid, one of you gets hit by the proverbial bus, the other can stay in your home and not have the trauma of losing your home on top of your losing your loved one.
Term life insurance works like other forms of insurance you are accustomed to: You pay in, and if the bad event you’re insuring against (in this case, early death) doesn’t happen, then you will have “wasted” that money and get nothing in return. This is how your car insurance works. And your health insurance. And homeowners. It’s the very premise of insurance. The very best thing that can happen is that you pay in and never ever have to file a claim.
Term insurance is the simple, no frills answer for 99.5% of people. The exact amount and time frame you need depends on your personal situation, but almost assuredly you need a level premium, term life policy.
Who Might Benefit from Whole Life?
Personally, I think the only people who may benefit from purchasing whole life insurance are people who are planning to gift a large estate, and are working to minimize taxes on that transfer. Currently, the estate tax exemption is $11.2 million. I’m guessing, if you’re reading me, this is not a part of your reality.
Before even considering a whole life policy, you should be maxing out every other type of savings you possibly can. If you’re in the position of having maxed out a workplace 401k, and a ROTH IRA (directly or with the “backdoor” roth), and a Health Savings Account, and you have a bunch of money already in a taxable investment account, then maybe, just maybe, it makes sense for you to consider a whole life policy. But probably not.
For more information, here’s some followup reading:
Mom & Dad Money: Why Whole Life is a Bad Investment
Whitecoat Investor: Debunking the Myths of Whole Life Insurance