How do I best decide whether to buy term or whole life insurance?
I need to figure out which is best for my needs.
Answers | 6
There are 2 ways to value life insurance. There is no way to put a value on a life.
1. Loss of income due to death of the primary earner (lost earnings calculation)
2. Lump sum value to pay off all debts in case of loss (debt value calculation)
There are 2 basic camps with this one (there are zillions of subsets which I will leave for others to explore).
1. Those that sell term
2. Those that sell whole life.
Ask your question to both groups and listen to what they do and do not say. Our group does not sell any insurance. So here is my balanced view:
Simplicity - Term is much easier. You pay the premium and get covered for the desired term.
Competitive pricing - Term is much cheaper and more like a commodity, meaning that similar terms are priced similarly. Even after adding up all the renewals, term has a lower cost outlay.
Flexibility - Many term policies are renewable and convertible. Whole life and cash value policies only work out well when they are held for life. Once you're in, it's tough to cancel them without losing money. Keep in mind that the cash value is not paid out as a death benefit.
Tax-advantaged savings with whole life - There are a wide variety of tax-sheltered savings plans, including employer-sponsored retirement plans, individual IRAs, education IRAs, and state-sponsored tuition savings plans. Moreover, the IRS has recently relaxed penalties on early withdrawals for things like first-time home purchases, educational expenses, and catastrophic medical bills.
Investment options - Cash value investment options are often limited. Variable life policies typically offer index funds, but not necessarily a broad-market index fund, and rarely the option to buy individual stocks. Also cash value plans add a morality expense fee.
Tax-efficient estate planning - In a few cases the complexity of an estate may grant you more entitlements. Keep in mind the cost of that complexity and compare this with what you actually get in return.
Insufficient retirement savings - For seniors, term insurance in retirement years will be extremely expensive, and may not be available at all. In this case, a cash value life insurance plan may be the only way to provide your spouse with sufficient replacement income, should you die first. Keep in mind that an Investment Manager (IM) may be able to get you 20% or more per year in cash flows. There are minimum account value requirements and other variables.
As you get older, your income replacement needs generally get smaller. Buying shorter-term policies will allow you to reduce the death benefit of your policy accordingly, with each successive term renewal. Reduced death benefits mean reduced premiums. This varies with your needs. In general, shorter terms provide more flexibility and the potential for cutting costs at renewal, while longer terms offer a better price for a given level of insurance over a given term, as well as greater predictability in price.
Before you purchase a multi-year term policy, be sure that the premium is guaranteed to be level over the entire term. A surprising number of "level term" policies guarantee this for just a portion of the term. After this partial term is over, premiums might increase, although these increases are usually subject to some guaranteed maximum.
A convertible term policy may also work. These are priced competitively with similar policies that don't include the convertible provision. This feature allows you to convert the policy to an equivalent cash value policy from the same company, without a medical exam, should there be a fundamental change in your health or retirement plans during the policy term.
Forced Savings - Your premium payment for cash value plans does promote a savings discipline. However, automatic payroll deductions into a tax-sheltered retirement account can serve the same purpose. Also, funds can be automatically and regularly transferred from your bank to your brokerage account or dividend reinvestment plan (DRIP). Compared to these options, a cash value policy can be a relatively expensive way to feed your piggy bank.
On cash value plans, as an Investment Manager, I have the capability to get cash flows greater than 20% on a yearly basis. By not spending the cash flow, it will continue to grow at the CAGR. We can easily customize a plan for you that uses your Minimum Acceptable Rate of Return (MARR) on a yearly basis. With an efficient estate plan, your beneficiaries can be accommodated as per your wishes. The ROI will vary. We want more inflows than outflows.
Again, every situation is different. As a fiduciary, I suggest you always do what is in your best interest.
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It's not what you make, It's what you keep that determines your lifestyle.
There are other solutions to consider as well such as guaranteed universal life, which is essentially 30-80 year term plans. You can pay a level premium for as many years as you wish.
The big thing to understand is it is never an either or situation, never an all or nothing situation when choosing your life insurance plan. You can mix and match and put together what works for your situation both short and long term.
Term which for a certain period in your life
Whole Life which has all the Guarantees of Death Benefit Cash value and guaranteed Premium, the nice thing about that is there projection up and above all of that which builds more cash and Death benefit with projected option to stop paying premiums.
The third one is Universal life which is flexibility. you are best to sit down with someone and go over your certain situation .
IUL's provide you with growth, risk protection (floor), life insurance and tax advantages (what more can you ask for?). Contact a really good broker to find out more. There are a lot of good insurance companies that carry these products.
Term Life Insurance is really only death insurance. In the event of an untimely death within a specific term period (ie. 20 years), your beneficiary will receive the benefit to help with financial concerns, planning, etc. You pay premiums but receive nothing.
Whole Life (and it's "partners" Universal Life, Variable Universal Life, and Indexed Universal Life) are true Life Insurance policies. First, there's guaranteed death benefit for your beneficiary (like term), at any age you pass (unlike term). Second, and more importantly, you as the living, breathing insured can financially utilize your policy... To what degree all depends on which policy you choose and how your policy is set up.
I hope this helps!