One of the most common questions about life insurance is whether you should you buy term life insurance or whole life insurance? This article gives some reasons why whole life insurance may fit your needs better than term life insurance. As always, consult with a financial planner.
In almost every corner of the financial universe, we’re told that term life insurance is a better deal than whole life insurance. In general, I agree – I think we all do. But, there are times when whole life insurance actually makes sense.
Based on logic alone, it has to be true. Since each of us have different needs and goals, there really is no such thing as one size fits all. Term might come close, but it’s not the best choice for everybody.
I want to be honest and upfront, I did not come up with this post on my own, it was inspired from Neal Frankle’s guest post on this blog titled, “How Much Life Insurance Do You Need?” Neal wrote a great article about term insurance and how whole life is usually inapplicable stating,
- Only buy term life insurance for income replacement and family protection.
- Think of life insurance in terms of income replacement. How much income will you need and for how long?
Once you determine that, it’s easy to figure out how much you need to buy.
I think it is the word, only, that usually gets me going, but in a good way. It has inspired me to write 6 Reasons when to Use Whole Life Insurance. Why 6? Seems substantially more than 5, but less than those long 10 lists!
Another form of insurance that we are asked about commonly is mortgage life insurance and whether you really need it or not. Check out our post for more information on mortgage life insurance coverage!
When You Truly Need Permanent Life Insurance
One of the fundamental differences of term life insurance versus whole life, is once the term is up, you must renegotiate your insurance coverage. This will leave you with one of five options:
- Renew the current term policy into a new term policy of equal length – with a higher annual premium.
- Renew the current term policy as a one-year renewable term policy – that will keep the premium down at the beginning, but they will increase each year.
- Renew the current term policy, but reduce the amount of coverage in order to keep the premium level.
- Apply for a new policy and risk rejection or a higher premium due to age and/or health conditions.
- Let the policy lapse, and go without life insurance.
For many people, this is equal to playing with fire. Some people actually do need permanent life insurance. It could be that there is a family history of terminal diseases. In this case, the time to get life insurance is while you are young and healthy. Having to renew your coverage every few years could result in complications.
Whole life insurance is true form of permanent life insurance. You take the policy, and once you do, you have it for life. Both the benefit and the premium are fixed for life, and that provides a level of certainty that a term policy cannot.
When you need a forced savings plan
Financial planners always say “buy term and invest the difference.” That’s a winning strategy if you are the kind of person who can save money. But what if you can’t?
Whole life insurance may be a poor investment vehicle, but just about any investment plan is better than none at all. Since a portion of the premium of a whole life policy goes into an investment fund, it represents a form of forced savings.
Term policies have no investment provision at all, which is why they’re sometimes referred to as pure life insurance.
When you’re over 50 – or getting close to it
One of the other fundamental problems with term life insurance policies is that premiums rise as you get older. Sure, you can take a 20 or 30 year term policy, but eventually even that will end, and you’ll be facing higher premiums.
If you feel that you will need life insurance coverage for the rest of your life, a whole life insurance policy can do that.
The trick is to apply for it before the premiums become prohibitive.
You’ll probably want to do that before you turn 50, or develop any health conditions. This is because premiums rise much faster as you get older, or you develop health issues. Once the premiums rise, your best bet is to go with a no medical exam policy, which will still cost much more than securing your life insurance at an earlier age.
Buying life insurance for children
Whole life insurance could be the better choice if you are buying a policy for your children. Since they are so young, the premiums will be extremely low. Add to that the fact that there is an investment provision, and your child will not only have low-cost life insurance, but also a budding investment portfolio.
The combination of permanent low cost life insurance – and the investment provision – can serve them well as they enter adulthood.
You could also take out a term life insurance policy on them, and it will be even cheaper than a whole life plan will be. But once the term expires, they will face the same choices that everyone else does in the same situation. If you’re going to purchase life insurance for your children – and it looks like it’s going to be term – consider adding a convertibility clause to the policy. It will add to the cost of the plan, but it will allow them to convert from a term policy to a whole life policy before the term expires, without requiring a medical examination.
Sometimes, your way of life, including your assets and interests, are the truest determining factor.
Lifestyle Reasons to Buy Whole Life Insurance
If you go beyond the numbers, there are simply times where how you live your life, or what you’ve accumulated, or even what you intend to do later on, which matters more than the dollars and cents of it all. Here are a few of those areas:
- You have a Special Needs Child – The whole argument that your child’s need for a lump sum ends at 18 or 22 is completely and utterly thrown out the window. In fact, it should 1000% be placed in a third party special needs trust.
- You have a liquidity Issue with your Estate – Most people who owe a federal estate tax (the top 2%) or a state estate tax (a heck of a lot more people than 2%) usually don’t have the actual cash to pay for it regardless of how rich they are. Want a cool example? Well it is a cool example for everyone except Joe Robbie’s Family. In 1990 when he died his family was forced to sell the Dolphins because they owed $47,000,000 in estate taxes. Yes that is 47 MILLION that the federal government got a hold of.
- You have a charitable intent – If it makes you happy to get your name on a building for the university or hospital of your choice, you can. And possible for very little out of pocket. Yup, you know what I am talking about…getting a permanent life insurance policy because your charitable intent will not be gone in 20 years. Additionally, depending on who owns the policy, payment of premiums may be an income tax deduction or upon eventual death an estate tax deduction.
- You have family health issues – Most whole life policies have riders that allow you to increase your coverage without additional testing. This could be a huge reason for most people.
- You want additional diversification – I’ll be the first to admit this isn’t a great reason, but this is one of the reasons I received for the purchase of another whole life policy from the client. He watched literally every investment decline in value while his cash portion of his whole life went way up (he is late into his policy). I would never use whole life insurance as an investment, nor should you buy it as such, but this particular man did.
- You own a business and want to take care of succession during life – Picture this…you are running a business with a partner. The partner dies and you now share business ownership with his surviving spouse or bratty children. By using a buy-sell funded with a whole life policy, you could have bought their shares. You get a step up for half of your shares (boring capital gains stuff) and the partner’s family has the liquid dollars they need. Why not buy cheap term life insurance? Because hopefully your business lasts a long long time and now instead of being 50 and uninsurable, your whole life insurance policy lasts until a later age.
So, maybe you actually do a need a whole life policy… now what?
How Much Whole Life Insurance Should You Buy?
This is one of those areas where you need to examine your current and future financial needs before making a purchase. You will also want to examine policy and free insurance rate quotes before making a purchase.
I wouldn’t suggest doing this part on your own. Talk to an advisor.
Editor’s note: This article was written by Kevin Mercadante and Evan, from My Journey to Millions. Evan is licensed to sell life insurance in the State of New York and is licensed to practice law in the State of New York. Check with your financial or legal advisor before making any decisions.
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Marsha Westbrook says
My step mother passed away recently, and my siblings have a question about Credit life on my mortgage, and my dads mortgage. I live next door I have been reading both of our contracts and do not see the words credit life anywhere. Could it be worded different to be hidden from us? I am a widow without benefits, my dad is a widower for the second time, and he has alzhiemers. I don’t know where to go from here. Can you help?
I do not agree with the forced saving option. In whole life policy, the mortality charges increases like anything when you are getting old.
In this scenario, You should buy a term plan and invest in some ULIPs. There also, you do a bit of forced investment.
Kevin Mercadante says
Hi Kevin – I tend to agree. Most people use the savings – what ever the source – to fund a better lifestyle, rather than for investment. Preventing that from happening seems to be the primary advantage of whole life.
Kevin Mercadante says
AWB – Agreed, life insurance has its applications and there are some ways where it works better than the alternatives.
Kevin Mercadante says
I’m with you in being squeamish about that statement, but a lot of people use the lack of perfection of investments as an excuse to not invest. In that case, a flawed investment is generally better than no investment at all. It may be the move that gets you moving toward better chocies going forward.
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