I gladly accept question from readers regarding personal finance matters. If you have a question feel free to email me at contact.tfom@gmail.com.
This question comes from Ed in Texas:
I currently have term life insurance. An insurance man wants to sell me Whole Life Insurance instead. I am 43 years old. I read in another of your posts that whole life insurance is not a good buy. Is that true. Thank you.
For most people Whole Life Insurance is an absolute rip-off and here’s why:
When buying life insurance you are protecting your income for your family should you die. Term Life Insurance fulfills this need perfectly and depending on your age and health it is inexpensive for the piece of mind it provides.
The product has a very simple formula: if you die, the beneficiaries of the policy get paid. A 43 year old male in good health should be able to get a $500K policy for around $25-40 a month. If your family depends on your income, term life insurance is a necessity!
Whole Life (or Cash Value) Insurance ads another element to the equation beyond providing your loved ones with income in the event that you die. With Whole Life Insurance, a portion of your monthly premiums goes into a separate savings account that “appreciates” in value over time.
One of the problems with Whole Life Insurance is these “savings” accounts have horrible rates of return and if you die, the money that has accumulated in your “savings” account goes back to the insurance company instead of your beneficiaries.
Furthermore, there are huge commissions associated with whole life insurance policies and almost all of your monthly premiums for the first few years go directly to paying the broker whole sold you the junk policy to begin with. This is the reason that your insurance agent is pushing you towards whole life insurance instead of term life insurance.
A better approach is to buy Term Life Insurance and invest the difference in a Traditional IRA or Roth IRA account.
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{ 2 comments… read them below or add one }
Great post! Being an ex insurance agent, you’re right on. I just wanted to comment on when whole life can make sense.
I mainly worked with retired folks, and there can be a time and a place for whole life insurance. Typically you can’t buy term insurance once you reach age 70. Even for those a bit younger, the underwriting for larger amounts of term insurance is much more stringent than for a whole life policy, or if your previous term policy’s term ends and you convert to annually renewable terms, the premiums begin to skyrocket.
All too many folks were sitting in retirement without any life insurance and minimal savings. The biggest need I found was folks wanting a whole life policy just enough to cover funeral expenses because they didn’t think they would live the 10 years or so it took to pay in as much as the policy would pay out at death.
Thanks for the clarification swanberg! That is a good example of when whole might be worth looking into!