I purchased another term insurance policy earlier this year to increase our coverage. I have had life insurance since the age of 25. However, my needs have changed so I felt insecure. I now earn more and have two children. I therefore need a bigger policy to replace my income.
The best thing about purchasing term life insurance? It’s so easy. The policy I bought through Haven Life didn’t require a medical exam. This perk is available to those who are of average weight and good health.
This post will explain why whole-life insurance is not the right choice for my family, our situation, and me.
- Whole-life insurance can be extremely expensive.
- I don’t know how to build cash value that I can borrow against.
- I will not need life insurance when my time comes.
- I am creating my legacy.
I also discuss Consumer Reports’ findings regarding term vs. full life insurance, and when whole lives might be a better choice.
Why not purchase whole-life insurance?
However, before I bought this term policy, an agent contacted me to sell me whole life insurance. Whole life insurance, unlike term life insurance which only lasts for the time you choose upfront (for this policy it was 20 years), is designed to provide a death benefit regardless of your age.
I was immediately hesitant about the idea of purchasing whole life insurance vs. buying term life. And this is not just because of one reason. Here are the reasons why I wouldn’t buy whole-life insurance and why term life policies work well for our family:
Whole-life insurance can be extremely expensive.
I immediately rebuffed an offer to get whole-life insurance quotes from someone who contacted me. It was strange that they suggested I purchase whole life insurance, without any knowledge of my finances or what type coverage I might need. I refused to listen to their entire pitch.
No, they didn’t ask me how much I would have to pay for the coverage I requested. It was $750,000. It’s not difficult to do.
State Farm has a calculator which provides basic quotes for whole and term life insurance. Their calculator generated a few numbers after I entered my birthdate, weight, and excellent health information. They suggested that I pay $62.40 per monthly or $717.50 annually for a 20-year policy, which I bought. My suggested premium for whole-life insurance was $859.13 per monthly or $9,875.00 annually.
This is only one estimate and the price of whole life insurance may vary depending on which provider I choose. It just shows how much more expensive term coverage can be than whole life insurance. It costs over 10 times more for the same coverage.
I don’t know how to build cash value that I can borrow against
The best thing about whole life or permanent insurance is the cash value it creates that you can borrow against. While whole life policies often pay dividends, they are not guaranteed. Some companies market whole-life insurance policies as complex investments and life insurance.
It’s difficult for me to see the benefits of paying ten times more for life insurance to create a quasi-savings account that I could access. There are many factors that can make this more complicated and difficult. I know that whole life insurance can be an effective way for wealthy families leave their inheritance tax-free. Is it really worth the cost for the average family to insure their whole lives to earn cash value and possibly score dividends?
Consumer Reports doesn’t believe so. They conducted a study and asked for life insurance quotes for a 40 year-old man from Illinois in good health. They found that the hypothetical man would have to pay $660 per year for a 30-year term policy worth $500,000 and $6,760 for whole-life insurance with the same coverage.
Consumer Reports showed that the excess premiums can be used to build cash value and are guaranteed savings. However, you could also achieve the same result by purchasing term life insurance coverage and investing any difference.
They write that you could also buy the 30-year policy and each year, invest the difference between whole- and term life premiums in conservative 10-year Treasury Notes. Consumer Reports discovered that Treasury notes with a yield of 2.17% would offer a greater return on your investment. Consumer Reports also notes that there would not be a death benefit after the term policy expires.
Bottom line: I don’t see the value in purchasing a life insurance policy with high cash values that doesn’t build cash value. I can instead buy term insurance and save the difference to invest on my own.
The example policy from State Farm shows that I could save over $9,000 each year by choosing the term policy rather than whole life. It would be more beneficial for most people to save and invest that money, rather than putting it in a quasi-investment fund like your whole life.
I will not need life insurance when my time comes
Whole life insurance has another benefit: it will pay out a death benefit regardless of when you die. This is in contrast to term policies that only pay out if you die within the specified timeframes (20 or 30 years). This is an enormous benefit if you are worried about having enough money to pay for funeral expenses and leave a legacy. It would be wonderful to die at 90 knowing that your policy remains intact.
However, I don’t think I would need life insurance if I were to become an elderly person. Life insurance serves the main purpose of replacing my income while I am young and working, while my family depends on me. I want my children and my family to be able to pay their bills if I die in the next 20-years.
What life insurance could I have to cover me when I turn 80? At that time, my children will be grown up and we will have been debt-free for many decades. A large portion of our income is being saved and we are saving for the future. Having a life insurance policy for my golden years will be unnecessary.
I am creating my legacy
Whole life insurance also helps you leave a legacy for your children. While I don’t disagree with that, it is something every parent wants to do. To achieve that, you don’t necessarily need to have whole-life insurance.
Instead of investing money in a whole-life insurance policy and hoping that it pays off, I prefer to keep more money in my own pockets. This way I can save cash and invest in real estate. You don’t need to pay someone to help you create a legacy. Instead, you can do it yourself with your own money and your own ingenuity.
Consumer Reports points out that it is difficult to determine if whole life insurance is the right choice. Insurers are not required to disclose how much of their annual premium is used to pay for life insurance or which portion builds cash value. It can be difficult to predict or calculate any “rate of return” as it is not easy to do so.
The huge commissions that agents make selling whole-life insurance are a great incentive to push the hard sell. Brian Fechtel, a life insurance agent and financial analyst, said that whole-life insurance commissions can reach as high as 130% to 15%0% of the first year premium. This can easily amount to $10,000. When your decision to purchase or not, could mean thousands of dollars in difference for you and an agent, how can you trust their advice? My opinion is that you shouldn’t.
However, this is not the only reason why I wouldn’t buy whole-life insurance. My goal is to keep my family’s lives and finances as simple as possible. That means that I buy a cheap term insurance policy and keep as much control as possible over our hard-earned money. I prefer to save or invest in cash that I can borrow against.