Whole or Term?

[deltoots]

My husband and I are both 33 y/o, we have a 2 year old and would like another child. We have some term life through work, but we’re considering additional life insurance outside of that. Our insurance guy recommended that we lock in a 30 year price guarantee for a term plan, but I don’t completely understand whole life plans. I think there can be dividend pay outs? We want to make sure to have enough coverage to take care of the other and kid(s) in the event of a tragedy.

Looking for advice on what might be the better route.

 

[genebgto]

@deltoots Term insurance policy is your best option unless you are a millionaire looking for tax saving strategies. Whole life is generally a bad product. Most folks get it wrong. You got a great agent. Shop around for an attractive premium for 30 year policy from a financially sound insurance firm. Work policy is ok but it’s likely not sustainable in the long run. Most policy are level term so premiums go up every 5 years so you will have no option but to drop the policy or reduce coverage when you really need it ( in your 50s)

 

[julie3685]

@deltoots I have whole life, and no I'm not a salesman. I chose whole life not as whole investment but more of a savings that I don't think about. Essentially I pay $100/month premium and that doesn't change throughout my life. I can make once a year contributions (need to make it worth it) of $1500+. The cash value as I understand is getting compound interest along with dividend growth on top. Break even I've been told it's minimum 10 years.

Term does have a bigger death benefit than whole life.

 

[evanburnside12]

@julie3685 If you had set this up with a term and PUA rider you would break even much sooner and could use your policy to finance purchases instead of paying a bank a significant amount of interest.

 

[innocent7]

@evanburnside12 I did that; breaking even now right before year 4, as predicted by my advisor.

 

[genebgto]

@julie3685 You’re much better off investing that money in VTI monthly. You are making money for insurance company now

 

[julie3685]

@genebgto I have other funds funding that..

 

[genebgto]

@julie3685 I work in financial markets. We need folks like you. Thank you

 

[tabinek]

@deltoots For me and my family, we’ve done term to cover salaries 20x for me and 10x for my spouse. And we both have small whole life policies that we’ll keep forever.

My whole life policy is design to be paid-up in 10 years and will grow with inflation (by reinvesting the dividends as paid-up insurance) so that my wife and daughter will have plenty for my final expenses.

You don’t need to do this all in one shot. Secure the term insurance to protect the most valuable asset you have (your earning power). Revisit a year or two later and secure the permanent insurance.

 

[rayeli]

@deltoots If you are wanting death benefit (which is what you seem to be looking for), term is the way to go.

If you want to have more of a financial/savings asset, whole life is what you want.

 

[deltoots]

@rayeli If they both have death benefits, and one of them pays out dividends in the event there is no tragedy, wouldn’t it make sense to do the whole life?

 

[rayeli]

@deltoots It really depends on your situation. Whole life is not really about death benefit. The death benefit is much smaller per premium paid than term life.

The whole life I have exists as a financial asset. The term life I have protects my family.

 

[genebgto]

@deltoots One is $100 vs $ 1000.
Can you afford $1000 per month for the rest of your life?

 

[bluebrown]

@deltoots No. You’re paying for those dividends. That’s why your monthly premium for a whole life policy is so expensive. You’re much better off just saving/investing that money rather than blowing it on a whole life policy. A term policy will cost like 5% as much as a whole policy. Take that 95% you’re saving and just invest it.

 

[jessica50332]

@deltoots Let's put this into an easier format.

Term is like renting a house. Less expensive, and for a set duration. At the end of the term, you no longer pay the premium (rent), but you no longer have a contract (place to live).

Permanent is like buying a house. Yes, the payments are larger, but you are creating equity in a product that YOU own.

30 year terms at ages 33 are also going to be much more expensive than a 20.

Do a cost analysis with your husband.

See what the total cost will be for the 30yrs for both of you.

Now see what the total cost will be for the 20yrs.

With the difference, consider opening 2 small, participating whole life policies with a premium offset for final expenses (funeral costs). Set your dividend options to "Paid Up Additions". By keeping the dividends in the policy you will be able to stop using your own money to fund the contract.

Before the time your 20yr term finishes, you'll have 2 paid up permanent life policies that will continue to gain value for the rest of your living days.

Because let's face it, there will be a tragedy one day. You, your partner...all of us are going to die.

 

[bluebrown]

@jessica50332 This is not a good analogy though, because buying a house is not that much more expensive than renting. Whole life insurance costs like 20x as much as term life insurance.

If buying a house cost 20x what renting costs, everyone would rent. It would make no sense to buy a house….just like it makes no sense to buy a whole life insurance policy.

 

[jessica50332]

@bluebrown We are not focusing on the numbers though. They'll fluctuate based on the age of acquisition of the individual.

Insurance is always cheapest when you're young. That too is not the same for home ownership.

Its the concept of ownership which is trying to be communicated.

A new or renewed term contract in your 50s and 60s is going to cost the same or more as a permanent contract started in your 30's. A permanent contract, when structured correctly, can be offset (paid up) in a known amount of years, while your cash value and death benefit continue to grow. Much like a paid off mortgage gaining market value.

There are more parallels than you think.

 

[aaron112]

@deltoots Be aware, you’re mostly asking insurance sales people.

The reason people opt for Term over Whole is cost. Whole can be 2-3 times more expensive, and you’d be better off investing that extra money yourself.

But as said by others, Whole starts making sense if you’re extremely wealthy and need more tax free places to invest your money.

 

[evanburnside12]

@aaron112

you’d be better off investing that extra money yourself.

That depends on what you're trying to accomplish. If you don't care about risk and just want to grow money as quickly as possible, and if you don't have any financing needs, then yes you can do this. But for most people they need guaranteed returns and constantly finance big purchases. So for most people whole life (set up for high cash value) makes a lot more sense.

 

[bluebrown]

@aaron112 2-3x? Try 15-20x. Whole life is a racket.