Term vs. whole life insurance... which is better?

Ed,
No one life insurance product is better than the other and you'd be best served to talk with a specialist who can help you to determine what is best for you based on a variety of factors.

Attached is a chart we put together describing the differences between term, whole, universal and variable. (Click here for the large version of the life insurance comparison chart.)

Feel free to contact me via the contact form if you want some help with your decision.

Ron's chart is very useful. One thing to ask yourself is, "How much can I afford per year?" If your budget only allows a few hundred dollars then term life insurance is probably best for you. Why? Because no form of life insurance is good if you let the policy lapse because it becomes unaffordable. Permanent policies are 3x's more expensive then term life insurance.

Term Term Term. Whole life and Universal life are designed to make the Insurance companies $$ not you. The Purpose of Life Insurance is only to provide $$ to your family to take care of your financial obligations. If no one is relying on your income you don't likely need much. Focus on keeping your investments and your insurance seperate. If you take the savings from Term plans over Whole or Universal for the same dollar amount and then invest the difference, you will be further ahead financially. I know this because I used to work for these companies. Who ever sells you a Whole or Universal policy makes a boatload of money compared to Term. This is because they make the companies much more money.

I'm really ignorant when it comes to life insurance. I've gotten some good information here. My question becomes - what are the tax advantages? I am 45 years old and have a life insurance policy through my work. But I want more, something to leave my son and his family. I want the most for the least amount of monthly payments. Help!!

That's the same here. I knew I wanted more insurance and that's what I did. Now I'm wondering if I made the proper decision. I already had term life through my job. I recently updated my insurance and added whole life, did I do the right thing? From reading the comments and reading Suze Orman book, term life is better. I probably won't get that much money from whole life over the years worth paying for. I should just save this amount every week. I'm 40, married, and have 2 boys 10 and 13. Please advise.

Term insurance actually makes more money for insurance companies than whole life does.........

Go with Whole Life.

It is my belief that if your primary goal in purchasing variable life policy is cash accumulation then I believe there are better ways to accomplish this. Variable life has many fees and administrative charges. You can purchase a tax deferred investment that invests into equities without all the fees that take away from earnings. With the rate of return in the stock market being so nominal over the years I don't see the additional risk in purchasing this type of policy justifiable. The death benefit is not guaranteed. The cash value is also not guaranteed. There is a possibility that you may have to increase your premiums over the years due to the poor performance of the policy. Buy term insurance and invest the difference!

What everyone overlooks about life insurance is this - how long do you want it to last? Term is cheap because 99% of the time you will outlive the term of the policy, and the insurance company will keep your premiums and never have to pay out a death claim. It serves its purpose when you have large needs and limited budget, but term gets more expensive as you get older, and at some point you won't be able to get any more because you're too old and in poor health. Whole life has higher level premiums up front because it builds a cash value, which yields dividends, which have the potential to pay your premiums for you until you die. ("Whole life" lasts for your whole life, hence its name.) If you want a guaranteed death benefit and a very efficient tax-free wealth transfer vehicle, whole life (Permanent insurance) is the only way. Some people also use whole life as a savings vehicle to create tax-free cash flows for retirement, college, etc. Consult a knowledgeable insurance professional (CLU, ChFC) before making a commitment, and be sure to go with a solid company. Cheaper is not always better!

Here's another hint: so-called "independent" insurance brokers are often paid higher percentage commissions on term from weaker companies, to motivate them to sell these products, sometimes more than 100% of the first-year premium. Yes, we make more commission on whole life because the premium is higher, but it's better for the client in the long run. When I represent a certain AAA-rated carrier it's because I know their products and underwriting standards, and I believe it's in the client's best interest to go with the best company, not the cheapest, and not the one that pays me a higher commission. And I won't be coming back in two years to replace your policy with a new one (thereby earning another commission).

I am confused with the current down turn in the economy My husband and I are 58 &59 yrs old with IRA's but no life insurance at all Is it too late to get term or is whole life way to expensive for us at this age (we are in very good health)

Would you please go into detail about death benefit, cash value guaranteed and tax advantage? I saw that whole life provided all those(from the chart)but I have no idea what they mean??

Whole Life Insurance has a guaranteed death benefit. The death benefit would not be effected by interest rates, mortality or any other factor. The cash value that accumulates inside the policy is tax deferred until withdraw. At that time any profit (premiums minus cash value) would be taxed at the policyholders tax rate. Whole Life Insurance is designed to provide permanent protection and a long term means of accumulating cash.

well, still somewhat(lots) confused. In whole life, no or less interest earned on premiums for frst two yrs, have to pay interest on my own money if borrowed and less cash value if i die. Also so much of term insurance i've heard and read on the internet that its cheap and invest the difference. Would i be better off by investing my self if i have term or should i be letting the whole life insurance company do that if i buy whole life at higher premiums? please suggest if i've written clear enough, appreciate it. i'm 43 yrs, married and have two daughters 11 and 9.

The main purpose of whole life insurance is to provide permanent life insurance protection for your entire life. Term insurance cannot accomplish this. The cash value of whole life insurance is can be very beneficial if measured it in the long run. You may then accumulate significant values that are tax deferred.

Bottom line, you need to determine what insurance company you buy insurance from, because it does make a different. Saying that there's no difference between insurance companies is like saying all car companies are the same. Whole life insurance yields pretty high returns over the course of 10 - 30 years depending on what company you go with. Northwestern Mutual, New York Life, Mass Mutual, and Guardian are 4 companies that will probably yield between 5 - 9% returns depending on the company you choose. The cash grows tax deferred and can be taken out tax free if done properly. For the older folks, it can be used not just as life insurance but as a tax shelter for your money. Imagine, by paying high premiums, you're building up your cash values quickly. If something unfortunate happens, the family gets a much higher return than what you put in. If you live strong and live long, the cash builds up significantly and you've successfully protected a large amount of your assets. But out of 1200 companies, if you go with any of them aside from the 4 mentioned above, you might as well buy term and invest the rest.

When purchasing Whole Life or Universal Life insurance the company you pick is extremely important to your long term cash accumulation. I would also consider Prudential and John Hancock in the group of companies to consider. When withdrawing cash from a life insurance policy be careful of the interest rate charged by the insurance company. If your policy lapses your withdraw may be considered taxable. Always consult with an accountant.

The idea that "buy term and invest the difference" is the right choice for everyone, no matter what their situation is, is ridiculous. There is no "right or wrong" kind of life insurance. Like many others have said, it depends on your situation.

A good example for those who may be somewhat confused is that whole life is like owning, where as term is like renting. Both serve a purpose. Buy term and invest the difference became popular when stock brokers became able to sell insurance due to deregulation.

Imagine if your stockbroker could suddenly sell (and rent) real estate and explained to you that you should sell your home, rent a similar apartment (from him of course, so he would get paid for it) and take the difference between your mortgage and your rent and invest it in the stock market. Naturally the stock market should give a higher rate of return over the long run than your primary residence, so why pay a mortgage when you can get a higher rate of return on your money elsewhere?

You would never do this because rate of return does not dictate every decision in your life, even when it comes to financial planning. You buy a house because you want to own it, pay it off, and have an asset to call your own. The rate of return is a nice aspect of home ownership but not the primary concern.

Whole life is very similar. People buy it because they want the death benefit to be permanent and guaranteed to pay off at death. The cash value is a nice secondary benefit (although you do want the highest possible, hence the importance of a good company as others have mentioned).

People who say term is always right (Orman et. al) have a very simplistic view to the financial planning process and probably are much more focused on making money for themselves than they are the well being of their "clients" or the people they "serve".

I agree with Ed. Everyone is different. Whether you purchase term insurance, whole life, variable life or index life insurance, I believe the most important aspect is getting the proper amount of coverage for your family. Do not sacrifice cash values for life insurance benefits. Sometimes individuals will purchase a whole life policy for 100,000 when they should have purchased 250,000 of term insurance.

Make this simple.
Term life insurance gives you a death benefit for a specified amount of time, and you should cover specific needs with specific insurance. For example, you purchase a house and take $100,000 loan for 30 years. A 30 year term for $100,000 would cover that need, so why overpay on a whole life to cover a specific need? If you have a 4 year old and want to cover college expenses you will not have that need in 20 years so term works well.

On the other hand, the need to replace income never goes away, funeral expense never goes away. These are the types of events that should be covered with whole.

The best way to set up your life insurance is a blend of term to cover specific needs and whole life to cover needs that never go away. In all reality, you should really look at your life insurance probably about every 4-5 years as your needs change over time.

I am not a believer in equity (cash value) building life insurance, you can get whole life that is guaranteed insurance for your entire life with no equity growth, which is lower premiums and accomplishes your goal of a lifetime of insurance.
One thing you must understand about cash value in whole life policy....unless you have a policy that adds the cash value to the death benefit (which is much more expensive), you do not get the cash value when you pass away. You have a $200,000 policy with $50,000 of cash value at death, the insurance company pays out the $200,000 and the $50,000 goes away, so why do you want that money associated with the life insurance?

The word "investment" should never be used with life insurance. If you want to accumulate money, do it in an investment product. If you want to guarantee no market downturns, look into equity indexed annuities.

My advice...don't pick term or whole, if you do a solid analysis of your own personal situation, the analysis will tell you how to set up your life insurance. To be properly set up, most of the time a blend of the products is the way to go.

Email me if you have questions...dhorsey@myclearview.com

David J Horsey Jr, CLTC
Clearview Insurance & Finanacial Services

Term insurance, return of premium term insurance, whole life insurance, variable life insurance, indexed life insurance.....there are so many different types. Everyone is different. Everyone has different needs. There is no wrong or right. The type of insurance you purchase depends on your individual situation. I would never say that whole life is bad for everyone nor would I say that term insurance is bad for everyone. The only bad decision is the decision not to purchase life insurance.

The type of life insurance policy a individual purchases should not be based on what type of insurance is most or least profitable to the insurance company. Your purchase which is based on your needs should be the primary focus. Term insurance is popular for a reason. Cost and coverage are the primary reasons why.

In reply to Tim's question, The death benefit that is paid to your family is the 13,618.00 This policy has accumulated dividends over the years which are paid at death.

I also want to make it simple …
First of all, I agree with some of you, that everyone situation is different, and I also believe that if you want to help someone, sit down with him/her/them and see what their situation is and decide how to do help.
I think, we should said that life insurance is not investment vehicle. Life insurance is only income replacement … remember it is only income replacement in the event something happen to you and you won't leave something behind.

When you buy whole life insurance, indirectly, you're also buying TERM insurance.
Depends on what kind whole life insurance you bought (straight, universal, variable) you are buying: Decreasing Term or Annual Renewable Term. What that means?
Decreasing Term means company is paying for your insurance less and less b/c your cash value is accumulating, so their responsibility is less and less from year to year, but you still paying the same amount. People can say "yes, but I am paying also into my investing" …. First never use word investing …. why? someone wrote down, that the second nice benefit is cash value … disagree …. When you are buying Whole Life Insurance (doesn't matter which one) you think you are buying Insurance+Investment …. my question is why you never received both of them: when you die you received Death Benefit (if any) and company keeps your investment or if you will live until age 100 you received your cash value (if any). Never both.
ART means that company renew your policy from year to year, so it goes up and up; when the policy amount is higher than your premium company start taking money from your cash value account and keep open account until you have money there, then your policy lapse.

I believe in term b/c in my opinion Is should have (or my family) maximum protection for less dollars for some period of time until I accumulate enough money to spend on my retirement. Of course, it's not make sense if you only buy only term insurance (although it's better than nothing) . I am Financial Advisor, and I saw many disclosures from insurance companies (whole life) … people believe me it was terrible.
Moreover, usually your investments in whole life insurance are between 2-4%. If you want to take money from you policy, you must borrow against it (usually 6-8%) !!!! It's like: you go to the bank to put money into CD for 3%; after 1 year you go to the bank … to take it but bank tells you "sorry mr/mrs but the value is ZERO"; so, you wait, go to the bank after 5 years; bank tells you "yes we can give you money (remember your money) but as a loan with 8% interest rate". From some of my Clients I heard that Agents told them that they do not have to pay any interest on it …. Of course not b/c interest is adding every year to the loan, so if you take a loan for $10,000 with 8%, then after the year you loan is $10,800, after 2 years $11664, and so on … of course you do not have to pay interest. Then when loan exceeds the value of the cash value, the policy lapse (you have a chance to pay it back in 30 days).

Guys, there is more and more, and more …. It's not a simply case.
If anyone needs help, let me know: info@ezconsultingcorp.com

Investment: it's another case …
"buy term and invest the difference" … means invest for your retirement, so long run.
In long run investment is always good. Always remember, keep eye on it. This is your money, nobody else … always check statements at least each 3 month and at least know what's going on the market. If you are not sure, call your advisor and ask him/her. Most people lose big bucks b/c they portfolio was design not appropriately at current situation … that's all.
If you do investment remember that you should have: long term bucket, medium bucket and emergency bucket … Start from long (retirement); then medium (3-5 years for some purpose); emergency (in the event something happen and you need money right now). I can write, and write … if someone needs help, let me know.

One more word to the person that wrote:
Final Note: Beware of "advisors" that have a 63 series license compared to a 66. 63 licensed agents have no fiduciary duty to their clients and do not have to look out for your best interests.

Everything is based on your ethics … for me it doesn't matter what license someone have, b/c if you are not a good person nothing will help you. Of course, it's not a NON-PROFIT Organization, but for me always is: First - Client, Second-Commission. That's my opinion.

I am a financial advisor with a major wealth management firm. I recently completed an analysis of a NYL Whole life illustration, that I would be happy to share. If you look just at the guaranteed portion of the illustration, it came out to earn 1.17% in the first 10 years and 2.9% in years 10 to 36. Compare that to a 10 year T-Bill rate of 2.78% and a 30 year rate of 3.49%.

I would be wary of any non-guaranteed portion of a Whole Life Illustration. Especially in light of the current economic environment, when so many financial companies are having to cut their dividends because of market losses. Even if your agent says "We've always paid around 5%" You may want to see if that's the guaranteed dividend.

By converting your term policy to a universal life policy you will guaranteed life insurance protection for the rest of your life. Do you need life insurance forever? Is your estate large enough where you will be subject to estate taxes. If so, life insurance would be a wise purchase. If your term insurance purchase was based on sole purpose of providing protection while your kids were in college than maybe you should cancel the policy.

All the questions I've had for years have just been answered! Thanks for a very good web site.

I enjoy this site because the questions are real life situational questions that are asked every day. The answers are direct, varied and give the consumers objective advice. I believe this type of site is more informative than most.

Why is term so cheap? Think about it. If you're paying $300 a year for a $1 million term policy, do you think there's a bat's chance that the insurance company expects to pay out on your policy? Definitely not. Of course, we still buy it because it's cheap and you never do know whether your time is going to be up tomorrow or 50 years from now.

Why would I buy a term policy during my working years when the likelihood of death is basically 0%, then drop it during retirement when the likelihood of death during retirement is 100%? If I'm going to buy insurance, I might as well make sure it's going to be in force when I actually need it, right? Otherwise it's been a waste of money.

Here's something interesting to chew on. Assuming you're 35 years old now and you want to have $1 million of life insurance in force until the day you die (assume age 85):

-Buying 10-year term policies, then renewing every 10 years until age 85, will cost about $375,000.
-Buying 20-year term policies will cost about $380,000.
-Buying a combination of term ($700,000) and whole life ($300,000) that totals $1 million, then decreasing the term insurance benefit as the whole life increases in value (so you maintain a steady $1 million of benefit up to age 85), will cost around $370,000.

Which is the most expensive? Hard to say. Insurance costs - when measured over a lifetime - are generally the same across all policy types. The difference here, though, is the flexibility you'd have if you bought the whole life. Dividends, guaranteed death benefits, guaranteed premiums, guaranteed cash values, flexibility to use cash values to pay premiums when I need to, availability of using dividends to offset premiums in the future, etc. There are a lot of reasons.

I spend a lot on whole life insurance every year, and I grin every time I write out a premium check because I know it's safe and secure, and I'm already making more in dividends and cash value increases than the amounts I write in premiums. Guaranteed returns. No risk. Can we say the same for our mutual fund accounts these days? No way.

Term is so cheap because they do not pay alot of death claims. The likelihood is STILL there that a death could occur, the chances being more than 1%. Why not purchase a large term life insurance policy during the families growing years and then later in life convert your term insurance to whole life or buy a new policy. You may not even need life insurance when you retire, Why make that decision now. Term insurance is not a waste of money. The protection and low cost are invaluable!

Term is an expense, thats money paid to an insurer and is not returned to you. Loss 100%!
Ofcourse in some situations it does make sense.

Whole life is an investment, the money you pay in comes back with dividends.
Whole life doesnt care why you bought it, when you retire and dont have the need for insurance then you can use it for anything else that you want...eg. leverage your other assets, take the pressure off other assets to perform. Putting other assets at lower risk mean your chance of success is greater.

The presence of whole life in your portfolio provides you with options. If you had to live through retirement just on your other assets, theres pretty much one choice and one choice only...live off the interest.

Life insurance should be permanent and forever. Cash values can only go in one direction...UP!

Term is for you if you are of modest means and expect your income to remain relatively stable. You simply need economic replacement of your life in case of a catastrophic loss; this is the essence of all insurance. An insurance company is willing to be on the hook for hundreds of thousands in death benefit for a very small premium because they know there is a miniscule chance a claim will be paid. Permanent insurance, specifically whole life, has an actuarial cost with the assumption of a much greater chance of claim; hence its higher cost. It has multiple benefits no other financial instrument possesses: Creditor protection, liquidity and tax advantages. I would argue that its rate of return is competitive. If you have a linear 5% rate of return tax-free and your tax bracket is 35%, you'd be hard-pressed to find an investment that could return the equivalent taxable return on a linear basis (between 7&8%) that shares the above mentioned benefits.

I dispute the idea that term insurance is only for people with modest means. I personally know alot of people with incomes over 250,00 that purchase term insurance. You do not always need economic replacement of your income for your entire life. Situations are different. I firmly believe that any reference to a whole life policy as an investment product is wrong.

Term is excellent coverage for working families with children. Yes, there is only a 1% chance that it will pay out over..say 20-30 years. But the amount you are willing to give up is very small compared to whole life over those years. The point of life insurance is to provide for those who need it in the small chance that you die. If I die at 75...well I do not think my family needs an infusion of hundreds of thousands of dollars. I already saved for retirement(money that would have gone to a whole life policy) and that money is there for them.

If I die at 60(worst case scenario)..before retirement and a few years after Term as been cancelled.. then there is no death benefit for me(unless I have group through a job). However, the need for a large death benefit is gone. Children are grown...house should be paid off..should be very few bills, and the retirement saved up to that point should be sufficient.

Of course it would make sense to look at your situation every few years and perhaps decide to decrease term coverage instead of cancelling. Decrease it to your needs at the time. If you get cancer and will probably die sooner, then obviously you wouldn't want to cancel since your need has just increased with medical bills.

But remember...all of the money you would have paid for whole life...could be in savings account ready to go when needed any time.

There are many choices when deciding what is the proper type of life insurance for a person to buy. Is the correct answer: term insurance, whole life insurance, variable life insurance, indexed life insurance or universal life insurance. There are many different ways to approach the solution without any answer being wrong. The most important decision, is the decision to purchase a policy. The second most important decision is to buy the correct amount of coverage. Everything else depends on your own finances, and what you want out of the program.

The financial advisor (also an independent agent) who is working with us wants us to only contribute up to the match in our 401K and use the rest for whole life insurance. We are both in our 50's and have been maxing out on our 401k's for a few years now. I feel very uncomfortable with not maximizing the 401k first before investing in life insurance. I don't understand the logic....Also he thinks my husband should take out the single annuity pension when he retires because we'll have the whole life for me...Does this make sense?

In regards to your decision to either maximize your 401k contributions or paying premiums on a whole life policy I believe the better choice is to maximize your 401k contributions. We are not making a fair comparison. The 401k (pretax) contributions will out perform the whole life thereby giving you a larger nest egg! No comparison!

Ron,

I respectfully have to disagree, based on re-thinking what exactly we are comparing.

This is a multi-hour discussion I will try to boil down to this:

When ever we have the nest egg strategy, we are told to live off the interest of the principal. If my wife and I retire at age 65, there is a 50% chance one of us will make it to at least age 90 (probably her).

That's 25 years.

Has the market consistently gone up EVERY year over the last 25 years?

Has it ever done that in ANY 25 years stretch?

No, eventually, you have to touch principal, especially when a market like this or 1987 hits (those are within 25 years of each other) , which reduces the size of our nest egg.

Remember, we are scraping cream off that top (interest), and then it is getting taxed at what will be a much higher rate for EVERYONE in the future (so what's the point of pre-tax?), but that is another thought.

So, we have our bad year, and now the nest egg is less. The market rebounds next year, but our interest is based on a smaller principal. We may have to touch our diminished principal again in order to keep up our standard of retirement living.

Additionally, we may want to consider living on LESS than the full interest amount, as we will need to GROW our nest egg DURING retirement AS WELL.

If you retired in 1985, and your retirement income DID NOT increase for 25 years, you would have a terrible time living on 2010's prices.

Further, what is around today that was not around in 1985? No one had a cell phone in 85, but could anyone reading this imagine their lives without one now? Anybody keep the black and white 18'' TV from their childhood? Or did more people on here go out and buy a 42'' plasma?

The point is, things will continue to evolve, and new products will emerge. Should you limit your lifestyle (and let's face it, right now, you probably currently do not), just because you locked yourself into the "nest egg" situation?

So, our 401k's give us a tax break now, but the TRUE rate of return must be measured against increasing taxes, inflation, and lifestyle.

Now, let's see how a Whole Life policy gives us a pass to use our 401k account more freely.

WARNING------WHOLE LIFE ADVOCATING------WARNING!!!!!!!!!!!!!!!

Our 401k is less than in the first example, because we used part of our money on the premium dollars for a whole life policy.

(quick aside, Whole Life is funded after tax.....so, we are paying taxes on the money right now.....that money in a 401k enjoys tax deferred growth, but the money in a whole life policy is NEVER taxed as income.....which is better depends on your situation and tax bracket.....for most people, tax free in retirement is the way to go.....so, even if you hate my WL talk, at least STOP putting money in your 401k after the match is meet, and plug it into a ROTH)

Whole Life becomes the PERMISSION SLIP for you to go out and spend down that 401k account. No longer do you have to live on interest, BECAUSE WE BOUGHT WL ON BOTH SPOUSES.

We are free to spend down our retirement accounts, because when one person dies, the other has a large influx of cash they can use to live on the rest of their lives.

But what if we spend the assets before we die?

Simple answer. If you have a QUALITY WL policy, you should have accumulated a decent amount of Cash Value.

This Cash Value is available for you to borrow against the policy......this is money we never intend to repay, as we can safely allow the interest of that loan to compound inside the contract, at which upon death it will be paid back, with the balance going to the beneficary.

As a matter of fact, you could use one of the spouses policies for this very purpose IMMEDIATELY when you retire.

Why?

Now, instead of pulling $40,000 out of your 401k to live on, and having it taxed in the 22% bracket, you can pull 20k out of your WL and 20k out of your 401k.

You are now in the 15% tax bracket (only the qualified money is taxable), and the other 20k comes to you tax free, as it is in the form of a loan on the contract.

Moreover, your actually get to have more money with the second strategy, because you have a smaller amount that is taxable at a lower rate than in the first example.

EX.1---about $31,000 after taxes

EX.2---about $37,000 after taxes (the 20k from the WL policy is tax free)

It's a beautiful thing.

That was a lot of information, and I'm afraid it is just the tip of the iceberg on the Whole Life story.

Here is some recommended reading:

http://www.lifetax.com/webdocuments/The%20Whole%20Story%20of%20Whole%20Life%202005.pdf

Basically, this is the most diverse financial tool available, and it should be the "bonded" part of an individual's portfolio.

I appreciate anyone who took the pains to read this far.

Andrew Burks

After reading a lot of the posts, I only have two comments that I want to make clear:

1.) When speaking about whole life, there are only about 4 companies that are even worth mentioning. Otherwise, term is the way to go. Can we clarify that? Because in that case, I wouldn't mind talking about WL as an investment. A 30 year yield of 7-10% sounds pretty good to me. Let's be honest....if I'm putting a piece of the pie in WL, I'm not looking for short term gains so who cares what it does in the beginning?

2.) Can we stop bringing up guaranteed values in WL and how low they may be? If you actually want to compare, I'd rather have guarantees in an "investment" than no guarantees at all! Putting the money in the market has 0 guarantees. I love how no one brings this up when they address guaranteed values in WL.

Bottom line...if you put all your money in the market, it's not that intelligent and that can be seen by the multiple baby boomers who have to work longer because the market tanked. If you put all your money in WL, it's also not that intelligent because you're denying yourself gains that could allow you to retire on time if not earlier. All in all, both products provide value in and of themselves. It's how you position each one to maximize your portfolio in order to retire on time and reach your financial goals.

I have both Whole and Term,my insurance agent says I need both,my financial advisor says I need one. I want my family taken care of when I die but don't want to waste my money getting there. I'm 41 and am more confused than ever.

Boy, you can really tell what companies each of these people work for. First of, I love the fact that there are certain people here the will actually recommend something over the internet with such limited information....that's crazy. Anyway....where do you earn higher commissions? Whole Life, Universal, Variable Universal....or term? Be honest. You know that the first 3 all pay higher commissions. You can't look at it simply like 1% of term pays out and all of Whole Life pays out. Here's a question. Where does all your money go in Whole Life? If 1% of term pays out because no one dies when they are young and you take out whole life when you are young.....where does it all go? Obv., it goes to the insurance company and the agent. And as for people saying the market has averaged 4% over the last 10 years.....heres a good question for the "advisor" who is really an agent. What has it averaged over te last 20....or last 30....because no good 'advisor" will put you into the market if you only have 10 years to invest. Have your "advisor" run a side by side including all fees and tax implications based off of your actual tax rate. Aslo have them disclose the commission. There's nothing wrong with asking this and they should have no problem telling you. Everyone gets paid some how...but it will help you get perspective.

I honestly believe I could make more money selling term. It is such an easy sell, a person could turn out a thousand apps a year no problem.

First off, as Ron mentioned, the worst decision is NOT to purchase life insurance. I write plenty of TERM on my clients, because they need X amount of protection, yet can only afford Y.

We protect first and foremost.

However, I work diligently with people to convert their term to WL as soon as it is economically feasible.

When you buy WL with a solid, dividend paying company. When your WL policy allows those dividends to buy more insurance, increasing both the Cash Value and Death Benefit.

When the Cash Value is a COMPLETELY liquid source of cash that can be accessed with policy loans that NEVER HAVE TO BE REPAID.

When it allows for tax deferred accumulation AND (if done correctly) TAX FREE withdrawls.

When the cash value is exempt from creditors, lawsuits, etc.

When the death benefit is income tax free.

And when that income tax free benefit allows a person to actually access and enjoy their wealth, spending down their retirement accounts, rather than merely hoping they make enough interest so they do not have to touch the principal.

THEN, I can easily recommend it....forget commission, it's what's best for the client!

The retirement game is NOT "How much money do I have to retire on?"

It is "how much money can I access in retirement?"

WL is the key to enjoying that hard saved monies, without worrying about leaving your spouse without means after you pass, or leaving a legacy.

Ask the retirees.....they'll tell you. They either wish they had WL, or are happy they bought it years ago.

Buying term insurance and investing the difference may not be a good stragegy for some people. If you have not been able to accumulate savings, retirement or other substantial assets your long term need for life insurance may be the same after retirement as before retirement. Your spouse may only have life insurance to fall back on. In this scenario whole life insurance would be appriopate.

Whole Life insurance has been in existence for many decades. I do not believe that all of those policyholders were "ripped off" by their agents. Term insurance can give you a greater death benefit than whole life for the same premium but there are other benefits that whole life offers that might benefit the owner.

I think I understand what has been said so far but I got some questions for you knowledgeable guys....This might sound dumb but Why is cash value more secure than investing on your own? I mean, the return the insurance companies (i.e New york Life) get on the premiums you pay are made by investing right? So isn't the risk the same as you investing in a mutual fund yourself? Furthermore, why do people say whole life cash value only becomes worthwhile after a extended period of time (15+ yrs)? and finally, wouldn't it be best to have term till you are in your 40s (so you can "invest the difference") and then switch to whole life to have a guaranteed death benefit for the rest of your life? I am not picking sides, just trying to understand this better.

The cash value in a whole life policy and investing on youir own is not the same. The cash value of whole life is derived from the general asset account of an insurance company..all of its assets combined. When you are investing on your own your investment is based soley on that particular investment..more risk. I believe it is better to have term insurance when you are young and purchasre whole life insurance later in life. It is very difficult to do financial planning for life insurance 40 years in the future.

So my financial advisor says I should buy term and invest the rest. My insurance agent says I need to keep my VUL that I have at 1Mil. I am 32 years old have 4 kids under 6 years old and do very well for myself as an employee in the 25+% tax bracket currently (the government loves me). As of now I max out my 401k as does my working wife to reduce our taxable income. Obviously I don't qualify for a Roth. Now what do you do? Who do I trust? Both the financial advisor and the insurance guy make money off me, but the only one putting money in the game is me.

JSK,

It sounds like you don't trust either one of them.

Beware of the 401k game....you may be robbing Peter to pay Paul on those taxes.

Traditional 'wisdom' says you will be in a lower tax bracket upon retirement......based on the way our last two presidents have spent money (that we WILL have to pay back someday), I would hate for you to save money pre-tax in your 25% bracket, and then wake up in retirement in some sort of ungodly 43% tax bracket.

Question: If you could get into a Roth, would you? (Combine income limits for couples are $140,000).

When purchasing a VUL policy or Variable Universal Life, the death benefit is most likely guaranteed for life. Before purchasing a Variable Universal Life policy an individual 32 years old must take into consideration many variables that may effect the purchase negatively. The time value of money (future death benefit) and the implications of withdrawing funds from the polciy are only two reasons why someone would not purchase this type of insurance. Purchasing a term life insurance policy and investing the difference might be a better choice.

Term Life insurance is a horrible way to go. If you buy a twenty year term at thirty years of age, you'll probably still be alive at fifty so the small premium that you have been paying will disolve. Not only am I an insurance agent, but I also had my father pass away at the age of fifty three. I recieved three hundred and fifty thousand dollars from a whole life policy he had bought in his twenties. I also recieved, notices from term life policies stating that his policies were no longer active. Buy Term Life if you would like waste your money, if you want to protect your family, whole life is the way to go.

I can't believe that the millions of people that purchase term insurance every year are wasting their money. If you need protection for your family, have a limited budget or need lots of protection then term life insurance is very appropriate. Term life insurance is an important part of financial planning for most growing famalies.

See the article for an interesting comparison of the two options: http://www.savingtoinvest.com/2009/03/life-insurance-whole-versus-term-and.html

To me, it comes down to a philosophical approach of life insurance and money for retirement years in general. This will then determine what my approach will be: Term or Whole.

My philosophy has always been to view life insurance as just that, an insurance policy designed to cover those years of risk to meet our family financial goals, if I were to die. Therefore, the years of risk are during the years that I am working accomplishing those financial goals and building a proper nest egg for the family. After that, at 65 or so, the risk, and therefore the need for life insurance, should go away with the nest egg being complete.

In other words, I don't want to have to rely on life insurance for my family after 65 so Term is the way to go for us. The philosophy behind Whole Life is designed for permanency, something that I think Life Insurance does NOT need to be nor has to be.

I am fortunate to have an occupation which currently has a salary of 600k. I am the only employee of my own company. Although i may not make 600k per year indefinitely, ill likely always make above 400k. Although i have considerable economic expenses for my children's health and education,i am trying to determine how best to plan for the future. My financial advisor has recomended a qualified retirement plan which is made up of an annuity and whole life as well as a 401k profit sharing plan. Does this seem reasonable? The whole life is for 2 million and ill get some additional term insurance. The thing that started to bother me about my financial advisor is that he also recommends separately from the above over funding a whole life policy in order to pay for education.

boy after reading this whole page... i think its best to save my money in the savings account this way i can always take out without have to borrow or anything in commision percentage to pay back... i mean why would i have to pay back my own money? its cruel and money scheme money making company acts like they own our money .. well guess what i dont have an insurance and i have alot of money in savings and i always pay my savings back without any commision and im happy!! this pages is so confusing back and forth on the term versus whole disagreements... it sucks basically the bottom line is the old fashion way works save!!!

100.000 whole life plan face value or death benifit.
90.000 cash value,dividends,intrest or proceeds. (Whatever they call it)
insured dies, never borrowed from policy
How much can the ben collect?
I have read that you cant collect both.
Only the 100,000 or the 90,000 usally the highest amount.
Some say the 90.000 is to fund the increase cost of the policy.
Can anyone answer this clearly? Thanks

okay.... I've read this whole page and is quite disgusted with alot of whats being said on here.I am a primerica agent(whole life worst nightmare)and we believe in buy term and invest the difference. Listen people need to know the truth! You need 5 to 10 times your annual salary in life insurance to protect your family.In WL you pay for two and get 1, 100 percnt of the time. Lets be honest there is no risk in investing. The WL company gives you 2 to 4 percent on your so called investment and invest your money in a higher return. This is why they charge you to take it out because it is no longer your money. since you want to give stats, The federal trade commision released that on average WL policies yield 1 to 2 percent even considering the fact it is essentially tax free.So in closing, why in the blue world would you trust an insurance company with investing your money?

If any person says Term Insurance is the only logical choice, they are being foolish and probably selling just Term insurance (which over 90% of all Term poilcies are never paid out) Also, if someone tells you there is no need for term and will only advise whole life as well may be trying to push their own agenda. It is very important that you meet with a Qualified Financial Planner who will take a look at each individual situation to determine what Type of Insurance is needed and affordable. If a person had the money to purchase whichever Life Insurance they wanted...9 times out of 10 they would all buy Whole Life.

I agree with Stephen's response in that a financial planner should look every individual's situation differently. There is no one policy that fits all. Affordability, and amount of coverage or the two most important factors in determining the correct coverage.

ANY life insurance is meant to protect your income while your responsibility is at its peak, when your family is young, when your mortgage is fairly new, when you have a ton of debt (if any), just in case you die prematurely and your dependents cant fend for themselves!! After 20, 25 or even 30 years, your mortgage SHOULD be paid off, your debt the same, your investments grown (mutual funds), and your kids out of the house!! A death after that will not be financially devastating to your family since you did the right thing, Buy Term And Invest The Difference!!!

I have a $1million dollar term policy for my wife and myself (each). We are both 33 yrs old with 2 kids. Well 1 (age 1.5 and another on the way in June). We both have a pension plan through our jobs. We are looking to invest money for our retirement, and our childrens education. We currently, metaphorically speaking, put our money under our matress and don't collect much interest on our money. Should term life insurance be our primary investment if it is within our means.

"The devil is in the details."

Once upon a time, I recall reading that compounding interest gives:

v = ((1 + r) ^ n - 1) / r

where

v : future value, relative to amount per period
r : interest rate per period
n : number of periods

Let's add a factor "f":

f : factor of (1 - t)
t : tax rate

i.e., "f" indicates how much money one keeps after taxes.

Assuming that one funds an investment with after-tax money, and non-taxable appreciative earnings, we now have:

v = f * ((1 + r) ^ n - 1) / r

because "f" serves to reduce the effective amount of each contribution. i.e., we earned amount "1" in pre-tax dollars, but can only contribute "f * 1" due to "t" being spent on taxes.

Yet we also obtain the same formula for deferred taxes and non-taxable earnings. In said case, "f" is a multiplier for the nominal future value (as opposed to each contribution), but the end result is the same; cf. associative property of multiplication.

Nota bene:

This write-up ignores the possibility of changing tax rates. Such is why people are advised to "play the odds" with respect to anticipated tax changes: It's obviously preferable to maximize "f", which means attempting incur the hit from "t" when it is at a minimum. A more thorough analysis, taking into account different tax rates over the lifetime of the contributions, would require a spreadsheet; it cannot be treated by a simplistic equation.

Ditto variable premiums. This simplistic model assumes constant premium pricing.

Time for a curve-ball:

Everything thus far assumes a 100% likelihood of collecting on "v". If one knows that one will never collect "v", then it's actually worthless... right? Using standard risk-benefit analysis, let's say that:

w = v * p

where

w : weighted -- or "probability-adjusted" -- form of "v"
p : probability of collecting the future-valued "v"; comes into play with term life

Now, then:

Go play with the numbers, and try to maximize your "v" and/or "w" as you see fit! As you can see, the math works out differently for known "v" with unknown "n" and unitary "p", versus unknown "w" with known "n" and estimated "p".

Disclaimer:

I'm not an insurance agent. I'm not a financial advisor. I'm just a propeller-head entrepreneur, who some years ago enjoyed his Engineering Economy class a bit more than most of his classmates. ;-)

The "tax paid per apple grown" in the orchard analogy implies tax paid on interest earned. A tax-deferral situation would be paying tax on each apple harvested for consumption. It's also unclear how much each apple is worth.

Furthermore, the example makes us tend to think in terms of total taxes paid, instead of total yield. If I make $1,000,000 per year gross, I'll pay more taxes than if I gross $100/year. That's fine. Sure, I'd like to pay as little tax as possible... but what I _really_ care about is how much money I have when all is said and done. Would I reduce my income by $1,000,000/yr to save $350,000/yr in taxes? (If you would, please send that $1M/yr my way, and I'll pay your $350k/yr tax bill.)

What many insurance salespersons won't tell you about whole life/cash value/universal life, etc. is that the "investment" portion of the policy is kept by the insurance company upon the death of the beneficiary. Even if you borrow against the cash value in the policy, and the beneficiary dies before it's paid back, the difference owed is deducted from the death claim. So, who are you really investing for when you buy whole life, you or the insurance company?

TERM INSURANCE IS THE BEST WAY TO GO! TRASH (Cash Value) Value policies allow you to pay for all three: Protection, Accumulation/Cash Value, and Retirement Income...But guess what? You can only exercise one feature at a time. Examples of these policies are...whole life, universal life, flexible premium adjustable life, paid up life, adn educational life (they all pretty much have a savings account built inside the policy). Simply put...Trash value policies promise to save your money for you with very low interst, but what they fail to tell you is that if you borrow your money you will have to pay back interest on YOUR money. In addition to that if you were to die your family will never recieve both the savings amount and face amount (only the higher of the 2) So what happens to the money you've been saving ALL YOUR LIFE...thats right, it goes right back to the Insurance company! Wow....now is that right? No! Wouldn't it make since to invest your own money with companies that have track records of much higher interst rates? If something were to happen to you your family would get both the face amount and the savings!!! Don't let slimy agents fool you into buying Trash value policies! Trust the commission for them is much higher. 9 times out of 10 they have Term Insurance! Most of them don't even know the what they are selling! It cost weigh more money and it costs your family even more money when they are left with these type policies! Do your research, read the fine print...LEAN NOT TO YOUR OWN UNDERSTANDING! TERM is definetly the way to go!

I spent an hour reading everything on this page and I can say that I am no closer now than I was before I started, in determining whether whole life is a good move or not. Even if I go to a financial adviser, I fear that his answer might be just one person's opinion and that 5 financial advisers will have 5 different opinions on what is right. If this were the 1990's, I assume most would opt for term, due to the bullish market, and the belief that any extra money would be better served in stocks, but it is not and thus the right answer evades me at this point.

I agree, it seems if you ask 5 people, 5 different answers; I do know that if you go with Term (i.e., 20 years)and once it terms out, and you are still 53, with a wife and 10 year old, but still do not have 1M of whatever you believe your famliy would need, now you need to purchase 20 more yaers.

I am looking at life insurance needs for my husband and myself now. We are 31 and 36, respectively, and have a 4 year old son. We make a combined annual income of around $55,000. We have a lot of bills right now (home, 2 cars, insurance for home, cars, daycare, utilities, etc.) and can't afford much more. I just want an insurance that if either of us kicks the bucket in the next few years that the other can pay off the house and vehicles and maybe put about 20 or 30,000 up for our son's college. What sort of life insurance would work best for us. Please keep in mind that we don't make or have a lot of money. We have no savings and really can't afford life insurance but we're at an age that I really don't want to be without it either and I want our son and the spouse left behind to not have to worry about the bills or college.

I just read all of the posts here and it seems like there are a few educated responses but a lot more uneducated and one sided responses. People a taking their turn on the soapbox, trying to spout facts and figures about how insurance works, who makes more commissions, etc... Are these facts really important? I would say no... I would say that because competition exists in the insurance marketplace, it takes care of most of these things people are worrying excessively about and you should just focus on whats relevant to you.

So which is better? (I am ignoring Variable Universal and Universal Life because that is not really part of the question) I would say both. I say that because everyone's insurance needs are NOT the same. A rich person has different needs than a poor person, an older person has different needs than a younger person. I will say this about Term, it does a very good job of what it is designed for. It is inexpensive and reliable. But that is where the discussion on term ends and the conversation on whole life starts. Term is for a specific amount of time. If you die during this time it is the best investment you ever made because you have created a legacy to pass on to your beneficiaries that literally cost you pennies on the dollar. But what happens if you live beyond your term insurance? Can you afford the new premiums which will be super expensive? Will you have developed a smoking habit? Have high cholesterol, diabetes or heart problems? And by the way, what if you invested the money you saved by buying not whole life and put it into investments that did not perform the way you thought they would? The answer is you are effectively screwed. 1. Your new premiums are going to be very expensive, more expensive then if you had bought whole life to begin with, 2. You just lost 20 years of investments because you were "fat, dumb and happy" thinking that your investments were going to bring you security and 3. If you can't afford the new premiums, you don't have any insurance.

If it sounds like I am making a case for whole life, I am. But let me repeat what I said earlier. Insurance is not supposed to make you rich. It is supposed to protect and secure your family's future buy replacing your future earnings if something should happen to you. Here is a good point for Whole life. While it is more expensive than term in the short run, in the long run it is less expensive and it gives your more options in the future. What do I mean by options? 1) It creates a cash value, that grows the longer you have the policy. 2) At some point, somewhere around the fourteenth year, you will have recouped every dollar you ever spent on the whole policy 3) At a certain point, your policy will have enough cash value that it spins off enough dividends so that you will never have to pay another premium for the rest of your life. That bears restating.. With whole life, your cash value means you have insurance even if you live to 125 with premiums. 3) Let's say you are only making 1.0010 % in a CD as in today's market... you put that extra money into your whole life policy and earning 4% tax free. Why not? You can still put money out when you need it. and 4) Its a safe guaranteed, asset class as part of you overall financial portfolio.

If you think that you should put all your discretionary money into term or whole life insurance, measure its performance, count on it for retirement, etc... you need a refresher class on financial planning. Insurance is not going to make you rich. When you are rich, you might not need insurance but in the meantime, have something in place in case the unexpected happens. If you can't afford whole life, buy term. If you can afford whole life, you will be happy that you did. If you are like some of the supposedly smart people that are posting here, I bet they are trying to buy term insurance the day before they die. They would be super smart!

In closing... buy insurance for "just in case" if you have people you love that you want to take care of or if you owe money on a mortgage, etc.. The term or whole life option is moot if you can't afford whole life today. Term is cheap, it covers you if you die but people need insurance when in the later years not when they are 65 or 43 or 21. Its less expensive to buy Whole Life when you are younger and gives you those options I talked about earlier. It covers you for your "whole life" it creates as asset class with guaranteed returns that aren't sexy (4%),

The "buy term and invest the difference" people had their chance. If you are still subscribing to this thought, you haven't been in the market for the last fifteen years and haven't seen its crappy performance. If $200 or $300 dollars a month is what you are considering, you aren't an investor anyways so don't use that inaccurate axiom for your insurance decision. Buy what right for you. Term and whole life have a place in everyone's portfolio but affordability and tolerance for risk have their place too. If you are like me and can't see the future, I like whole life.