Personal Finance

Should I Buy Term or Whole Life Insurance?

| by Ed Hinerman

Ah, the almost age old question, term versus whole life. What is the right thing to do? Forgive me for being more than just a little opinionated on this subject, but personally I think that is a right for anyone that is on the right side of an argument.

Whole life insurance, a cash value building permanent policy is one of the earliest versions of life insurance. Whole life insurance is sold as a savings plan with life insurance, a retirement plan with life insurance, a loan source with life insurance and I'm sure by some, a fountain of youth with life insurance. Whole life insurance is generally sold by life insurance agents that believe that whole life is not just the best way to buy life insurance, but the only way to buy life insurance.

What they don't tell you, primarily because it would end their career, is that whole life insurance is a horrible savings plan, a worse retirement plan, a silly place to borrow money from and unless it is in fact a fountain of youth, it is grossly overpriced. The cash value that does build in a whole policy doesn't magically appear but rather dribbles in as the leftovers from your huge premium payments after the internal and company charges. You get the honor of earning a little bit of interest on the little bit that is left. A good example is a policy my Dad had with New York Life. His parents started it in 1935. It had a $1000 death benefit. Since 1935 the premium payments paid have totaled $1387 and the cash value in the policy is now $723. Now there's some bang for your buck!

Term insurance on the other hand is essentially pure insurance. There is no cash value. No bells. No whistles. Just a guaranteed level premium for a certain period of time (the term) and a guaranteed level death benefit if you die while the policy is in force. Depending on your age you can get guaranteed terms ranging from 10 years up to 30 years.

Term insurance is a small fraction of the price of whole life insurance and really, from a practical standpoint, more appropriate. The truth is that most, and I am thinking that is 95% or more, of life insurance needs are not permanent needs. We carry life insurance because we have a spouse and children who are dependent on our income. Children, theoretically, reach a point where they are no longer dependent on us. That's a need that goes away. Term insurance! Replacing an income for our spouse is a need that should resolve itself at retirement or sooner if our assets outgrow the need for income replacement. That's a need that goes away. Term insurance.

Although I'm surprised it was never offered along with all the other magic mortgages of previous years, there are no life time mortgages, so life insurance for mortgage protection is a need that goes away. Term insurance. Business partners that carry life insurance as a buy/sell agreement aren't likely to still be business partners to age 100 or beyond. That coupled with the fact that most businesses and the associated value to a deceased partner's family change over time makes the need or at least the size of the need a temporary situation. That's a need that changes or goes away. Term insurance.

Bottom line. When there is a product that is available (term insurance) that meets 95% or more of all life insurance needs and you have people selling whole life insurance and they claim that it is the best thing for all needs, a lot of people are left wondering why. It's called compensation. An agent makes a lot more money selling whole life than term. Yes, I'm saying that whole life is a product that is primarily sold for the benefit of the agent.