Basically the only time you should run into a problem with big financial decisions is if you don’t know exactly what you want to accomplish, or if you don’t know how you want to accomplish it because the options are so darned confusing. There’s technically no "bad" financial product - just poor choices for what you hope to accomplish. Except in the case of whole life vs term insurance, in my opinion at least.
First let’s look at the money trail, which is my favorite "gotcha" point for just about everything. Your insurance salesman is going to push whole life over term life for one simple fact - he gets paid more for whole life. Now why do you think he gets paid more for selling you a whole life insurance package? Might it be that the insurance company makes more money off it?
Yep.
Their selling points for whole life is two fold. One, they claim your payments accrue interest, usually around 4 to 6 percent, and you can take out this money any time you need it. Second, you will get paid when you die.
What they don’t tell you is whole life is way more expensive than term, and the difference you could be investing in a mutual fund gaining 12%, is actually in a mutual fund in their name, gaining 12% for the insurance company. The other big thing they don’t tell you - if you live past a certain age, you don’t get paid, or you get paid much less than you should (and you’re really lucky to find a plan that would even do that).
With term insurance, for one it’s much cheaper, usually running around $50 a month for the same kind of whole life plan that would cost in the hundreds. Second, if you die, you get paid, if you live to 120, you get paid. The full amount too.
So tell them you want term insurance and watch the salesman grimace. He knows he’s not going to get much of a commission from you, because the insurance company won’t make a lot of money - which means you win.
Technorati Tags: Insurance, life insurance, Personal finance, term life insurance, whole life insuranceAdd to:
This is really good advice!
Posted by: Kristen | May 2nd, 2007 10:44 am |
I've never really understood insurance plans. Thanks for the great information and for sharing this with the Carnival of Family Life.
Posted by: kailani | May 5th, 2007 9:00 pm |
I went through the Life Insurance process a few months ago. I determined early that I wanted term and not whole life. My main reason was that with 2 kids and a stay-at-home wife, my needs were greatest now and after 20 years, my needs will drop off considderably. So, I have $1.1 Million in coverage for 10 years now and will probably get a $500k policy after that for 10 years. Then, I will get no policy after that.
When I told them (I talked to about 10 differnt agents) this, they wanted me to not discount whole life insurance and look at the benefits of it. They gave me a bunch of random figures and I told them that I am a numbers person and I wanted to see a data sheet with the exact return I would be getting. None of them would give me this becausee the returns are so bad.
That all being said, I have learned of one good use of whole life - set it up late in life with a kid as the beneficiary for avoiding estate taxes.
Posted by: broknowrchlatr | June 4th, 2007 9:54 am |
Interesting post. I am not a Whole Life fan, but could I suggest you read a couple posts from my blog? First, http://www.momentonmoney.com/2007/06/the_great_debat.html addresses Term vs. Permanent insurance (Whole Life is not the only type of permanent insurance) and http://www.momentonmoney.com/2007/05/prospective_cli.html looks at financial products as tools.
Lastly, there are some mutual funds which have 12% returns for periods of time, but anyone with a 12% long term expectation is too optimistic.
Art Dinkin, CFP
Posted by: Art Dinkin | June 11th, 2007 12:06 pm |
I am an independent representative for Primerica Financial Services. Primerica only deals with Term Life Insurance because Primerica, or myself doesnt want to rip people off. Buying Term and investing alittle money in mutual funds if the way to go. If anyone has any questions about anything, feel free to contact me on my email (mjdhpd@yahoo.com)
Posted by: Milton J Demaret | October 8th, 2007 1:31 am |
1st off, how can you tell someone they should expect a 12% annual return. And how can you tell someone for $50 a month they will still get paid on Term Ins even if they die at age 120. Do you have any idea what a 20 yr term policy or a YRL would cost at age 80? Your licsense to offer financial advice should be revoked immediatley!
Posted by: Steve | December 9th, 2008 3:21 pm |
Hi Steve,
Keep in mind this article was written in mid-2007 when stock market returns could easily reach and exceed 12%. Also I quoted the $50 a month as a direct comparison to similar whole life plans costing in the hundreds. As a final note, term life insurance has two expiration dates - the date you die, and the day you turn 120. In either case you get paid.
Posted by: Patricia Mayo | December 10th, 2008 3:58 pm |
This article is ridiculous. First of all who can say today that they are getting a 12% return on a mutual fund or any equity investment…i get that this article was written a while back but this statement has obviously been proven incorrect. Secondarily, to imply that whole life policies wont pay out is absurd. The only reason a whole life policy expires is if you either stop making payments or the cash value is so close to the face value that it can no longer be considered an insurance product. If structured properly, whole life policies can be an excellent savings tool. You can structure two policies, one whole and one term, in a way where after a few years, the dividends paid from the whole life policy will cover the entire cost of both while the face and cash value of the whole life policy continues to increase. You will most likely not get a huge returns, but you can use them as savings vehicles that eventually(after only a few years 4-7) pay for themselves. The person who wrote this article seems to be grossly misinformed.
Posted by: Josh | March 16th, 2009 10:56 pm |