I'm a financial adviser with $2.5 million of life insurance, and every cent of it is the same kind for a reason
- Buying life insurance is one of the most important financial decisions anyone can make, yet too many people don't appreciate the gravity of it. Cost is always a factor, as well as the fact that life insurance provides little in the way of immediate benefit.
- Because most people need a lot more life insurance than they have, term life is usually the better choice. It costs just a fraction of whole life, which means you can buy a lot more coverage.
- Even though term life will be the best insurance solution for most people, there are times when whole life will be the better choice.
- Policygenius can help you compare life insurance policies to find the right coverage for you, at the right price »
As a former financial planner, I both recommended and sold life insurance to many of my clients. But I'm also a consumer, and need life insurance as well. Naturally, I'm a big advocate of having the right amount of life insurance coverage. I personally have $2.5 million in life insurance.
That may seem like a lot, but I have a wife, four children, and I own several businesses. It's a matter of matching coverage with the ongoing care of my family, and the payoff of any liabilities, upon my death.
Now I must make clear upfront that I have a bias — my entire $2.5 million in life insurance is made up of term policies. Because of the amount of coverage I need, as well as what it would cost for an equivalent amount of whole life insurance, term life is the right choice for me. And it is for most other people as well.
But so many insurance agents are big advocates of whole life insurance that I had to at least find out exactly how much it costs.
Here's what I found out and the reasons why I think term life insurance is likely to be the best choice for you over whole life insurance:
Term life insurance costs significantly less each month
For most people — and financial advisers — this is the most compelling reason to choose term life over whole life. You probably already know that, but you may not know the magnitude of the cost difference.
Here are some examples of annual premium differences for a $250,000 policy:
- 30-year-old male: term life, $225; whole life, $2,395
- 30-year-old female: term life, $190; whole life, $2,138
- 35-year-old male: term life, $253; whole life, $2,843
- 35-year-old female: term life, $223; whole life, $2,540
- 40-year-old male: term life, $343; whole life, $3,440
- 40-year-old female: term life, $288; whole life, $3,105
As you can see from the premiums listed above, whole life costs at least 10 times as much as an equivalent amount of term life on average. It should also show you why 100% of my own $2.5 million in life insurance is term life. I didn't want to dedicate ten times as much money to life insurance by buying whole life.
Even though you might prefer the security of permanent life insurance coverage that whole life offers, as well as the accumulation of cash value, the wide difference in premium rates forces most people to lean heavily in favor of term life insurance. If you're on a budget, and most people are, it's not even a difficult decision.
If you need a large death benefit, term is much cheaper
If you're a 35-year-old male, you might have been able to afford $2,843 per year to pay the premium on a $250,000 whole life insurance policy. But the major question became will $250,000 be sufficient coverage?
If I were single and had few obligations, or my wife were fully capable of surviving on her own financial resources, it might have been plenty. In fact, it may even have been more than enough.
But being married, with children, a big mortgage, and several businesses, it wouldn't come close to meeting my needs.
I may need to $250,000 just to pay off the mortgage. Another $50,000 might need to be available to cover final expenses, including uncovered medical expenses.
But then there's the issue of providing for my family. If my children were, say, 16, 14, 12, and 10 years old, I would need to provide for them for at least the next 10 years. That requires a much higher level of coverage.
For me, or anyone else in my situation, it's easy to see how $250,000 in life insurance is completely inadequate. At a minimum, I needed at least $2.5 million in coverage. I can get that much coverage with a term policy for about the same cost as a $250,000 whole life policy.
But to afford a whole life policy for $2.5 million wasn't doable. The annual premium would approach $25,000.
By contrast, I was able to get a $2.5 million term life policy for well under $2,500 per year.
This is exactly why term life is so popular among people with substantial financial obligations. Whole life is too expensive to make those provisions, while term life provides the perfect balance between need and cost.
If you have a health condition(s), it's often easier to get term life
I didn't have any health conditions that would affect my life insurance premium. And though this isn't a major consideration for most consumers, it's a possible issue for insurance companies. When an applicant has one or more significant health conditions, it's often easier to get term life than whole life.
The reason has to do with the length of the policy. Since a whole life policy is permanent coverage, the insurance company is guaranteed to pay a claim. Now that's true on virtually all whole life insurance policies. But when an insurance company provides a whole life policy, they generally expect it to be in force for decades. When it is, the policy will be profitable even with the payment of the death benefit.
However, if a 40-year old takes a whole life policy and dies 15 years later, the company may take a loss. Of course, this type of situation is not uncommon. But life insurance companies naturally want to minimize this outcome by approving applicants with better health. They may reject this application determining it to be too risky.
But the same company may approve the applicant with a 10-year term life policy. Though the applicant's health condition may give a strong indication he won't have a normal life expectancy, he may be judged an acceptable risk for a limited term policy.
Even still, there may be times when whole life is the better choice
So far, I've been singing the praises of term life insurance. And that's definitely the better choice for most people. But are there times when whole life is the better choice? Absolutely!
In fact, there are actually several situations when this may be true:
If you're buying life insurance very early in life
A 25-year-old female can purchase a $250,000 term life insurance policy for about $178 per year. She can also purchase a whole life policy in the same amount with a premium of $1,795. On the surface, the cost differential may not seem like a smart choice. But the applicant will be locking in her premium for the rest of her life.
That may not seem like a big advantage when she's 30 or 40 years old. But it will look like a much smarter decision when she's 50 or 60 years old, and the cost of renewing a term insurance policy reaches or exceeds her locked-in premium for a whole life policy.
When you have a family history of serious illness
Though you may be perfectly healthy now, your family's health history may indicate an uncertain future. A whole life insurance policy taken now will guarantee you won't need to worry about the condition of your health in the future. You'll be locking in coverage, come what may.
The insurance company will take your family's health history into account with either policy type. The premium may be slightly higher if there's a negative history, but not nearly as high as it will be if you were to actually experience a serious illness.
You don't save and invest money
Let's get one point out of the way quickly — life insurance is not a very good investment. It's often said, buy term and invest the difference, and that's absolutely correct. You'll be better served buying a term life policy, and investing the money you save from a whole life policy in an index-based exchange traded fund. The long-term performance will be far superior to what you'll earn on the cash value in a whole life policy.
As someone committed to building long-term wealth, saving and investing money is what I do with very little trouble. An investment-type life insurance policy, like whole life, wasn't a good choice for me.
But what if — for whatever reason — you don't save money? And if you don't save, it follows that you won't invest either.
In that case, a whole life policy can act as a forced savings plan. You'll be making your policy premium payments on a regular basis, and gradually building up cash value as the years pass.
At any point you'll be able to take a loan against the cash value and use the proceeds for whatever your need happens to be. Alternatively, at some point in the distant future you can liquidate the policy and collect your cash value.
That won't be as effective as saving and investing money in more traditional ways, but it will allow you to build an investment with no additional effort on your part.
Term life is usually the better choice — but not always
It's clear that term life was the right choice for me, and it will be the preferred choice for most people. Cost alone will make that point obvious, especially if you need a large amount of coverage.
But there are some people in certain situations where whole life should be considered. If one of them applies to you, you'll need to ignore the conventional wisdom, and take a close look at your options with a whole life policy.
No matter which policy that you go with — term life or whole life — be sure to shop around. If you take a policy from the first company you apply with, you'll almost certainly pay too much. The better strategy is always to solicit policy quotes from multiple insurance companies. That will give you an opportunity to compare policies side-by-side, and see which will provide the most coverage for the lowest premium.
Policygenius can help you compare life insurance policies to find the right coverage for you, at the right price »
Jeff Rose is an entrepreneur disguised as a financial adviser, author, and blogger. Jeff is an Iraqi combat veteran having served in the Army National Guard for nine years, including a 17-month deployment to Iraq in 2005. He's best known for his award-winning blog GoodFinancialCents.com and book, "Soldier of Finance: Take Charge of Your Money and Invest in Your Future." He's also the founder of Wealth Hacker Labs, a movement to teach accelerated wealth-building strategies to future generations.
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