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Life Insurance - Term vs. Whole Life

Posted by Aweaverii on 8/12/2009 at 11:18 AM | 10 answers | 1873 views
I am turning 30 years old in several weeks and expecting first baby at the end of October. At this stage of life, I've been thinking about life insurance, but have very little knowledge in the subject. Life insurance is not the most exciting investment when you are in your 20's; although I am questioning the how smart it was to wait to look into the subject.

Can anyone help me with the benefits of term vs. whole life? What are the things I need to think about when picking provider and discuss some providers who people had good experiences using?

Thanks

AW.

Answers

This is a pretty controversial topic, and these links pretty much sum up how I feel about it. Keep your insurance and investments separate.

Whole life vs. term life insurance [CNN Money]
Term or Whole Life? [Smart Money]
Dave Ramsey on life insurance [YouTube]
Susan Orman on life insurance [YouTube]
My view:

Whole life is life insurance for your life.

-- Pros:
1) Builds "equity" through your premiums and investment;
2) you can borrow from your equity;
3) the insurance agent who sells this to you gets a nice commission so make sure it's someone you really like.

-- Cons:
1) Return on investment is not guaranteed;
2) ROI may only be 1% to 4%;
3) During unemployment/disability you may have to choose food or insurance premiums
4) May need riders for inflation, disability, and unemployment, etc;
5) premiums are 3X higher than term insurance;
6) when you die your beneficiaries only get the life insurance (the insurance company keeps your "equity")


Term insurance is like "renting" life insurance for a stated period

-- Pros:
1) Pure insurance (not commigling of insurance and investment)
2) Cheapest form of insurance
3) Easy to shop online (look for AM BEST rating of A, A+ companies)
4) People are living longer so premiums have declined about 30% over the past 10 years

-- Cons:
1) Your family medical history may prevent getting insurance
2) Must avoid hazardous hobbies like private pilots license, sky diving, etc.
3) The longer you wait the more the insurance costs for the same insurance.
4) Policies over $500k may require health exam

My conclusion: Buy enough term insurance to replace your salary for 10 years and long enough to get your youngest child through college.

Enjoy.
I'd see about getting something before you turn 30. I think the rates change at the age. I have universal life. I got it after I understood about it and should have gotten term. Now, if I canceled my policy and got a term policy, the term policy is more expensive than what I have with universal life for the same coverage and I'm only 34. I also got my policy when I was 29, right before the rates changed.
Also, I'd pick a company that has good financial strength (rating A or better). You want to pick a company that will be around in 20-30 years.

Here's a link to check out the ratings and the financial strength of insurance companies.

http://www.ambest.com/
I am a big fan of whole life - as long as it's overfunded and issued through dividend paying, highly rated mutual insurance companies. (Lafayette Life, Guardian, New York Life, etc...). Sooooo many benefits if you use it properly - where you would earn FAR more then the 4% internal rate of return (read "Bank on Yourself" by Pamela Yellen). ANother good book to check out is "Pirates of Manhattan" by Barry Dyke - basically explains that the banks buy whole life by the tractor-trailer loads... yet they tell "Joe Average" to go out and buy term insurance and throw a dart and invest in mutual funds where the only "true" winner is the mutual fund company. I have still yet to meet ANYONE who made their fortune by investing in the stock market - all of the wealthy people i know (and I know quite a few) made their wealth by 1) inheriting it (lucky sperm club) 2) selling a business or 3) saving far more then they earn - regardless of where they saved it. If you check out the latest Dalbar study, you'll see the average mutual fund investor earned roughly 1.5% BEFORE taxes and expenses over the past 20 years!! That's IF they didnt buy high and sell low also. All I'm saying is.... if everyone is telling you something is good, my advice - run the other way :)
I wasn't familiar with the Dalbar study, so I did a google search and found this.

"According to Dalbar and their research, the buy and hold equity investor (S&P 500) would have earned a return of 8.35% over the last twenty years, while the "market-timer" would have earned just 1.87%. As to fixed income (Barclays Aggregate), the buy and hold investor would have earned a return of 7.43%, while the "market-timer" would have earned just .77%.">

So the conclusion is that "buy & hold" beats market timing (which, at 1.87%, would definitely pale in comparison to CD rates over the past 20 years).

I guess it's pretty popular to talk smack about the stock market during a down cycle. Take a look at this chart, for example. It shows CDs beating the S&P from 1994 (due to the drop in the market over the past two years), however it conveniently ignores the fact that if you were to get out of the S&P in late 2006, you would still be far ahead of the CD returns. Everyone knows the stock market can be extremely volatile over the short term, so the lesson there is that you should shift your funds into safer investments as you approach retirement age.
Ugh, I wish we had an editing or preview feature on the comments. My first link got boggled up. Anyway, here's the March Dalbar study:

http://www.qaib.com/showresource.aspx?URI=advisoreditionfreelook&Type=FreeLook

Here's another recent Morningstar study that shows index funds beat actively managed funds most of the time:

http://indexes.morningstar.com/Index/PDF/MorningstarMarketCommentary063009.pdf

So, no wonder DRDOLLAZ hasn't met anyone whose made their fortune in the stock market. It seems that passive investing is the route to go for the majority of investors, and it is extremely difficult to get rich quickly by any method (stocks, CDs, insurance, etc.).
IMHO you should buy a term policy in short order, 5-10 times your salary is good spread depending on your situation. You can always dump it and move to another policy if you change your mind, but you should have coverage soon given that you are expecting.

I personnaly don't consider life insurance an investment, it's insurance. Most whole life style policies are trying to do two things, investment and life insurance. How many products that you've ever purchased that do multiple things are really good at any of them? They may be okay, but really good?

If you are looking to something like "Bank on Yourself", keep in mind that's more of an investment philosophy utilizing insurance vehicles that not all insurers carry and it channels a good bit of your income towards it. So that's something where you'd have to read the book and determine if that type of investing is something you want to do.

Above and beyond all this, I would suggest looking at disability insurance if you don't already have something along those lines. You're more likely to get injured and be out of work for an extended period of time than die.
Thanks everyone for your answers! I think the answers were very conclusive to go the term life route. I see where people may like the idea of whole life, but I own rental houses and the whole life seems to be similiar to owning a rental house without the cash flow and the leverage.
Read "Total Money Makeover" and listen to Dave talk about Whole life insurance. I doubt you will have any interest in buying this garbage after that. Just get a Term life policy.

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