Aka my first controversial post
As I mentioned in my last post, the whole life insurance vs term life insurance can become quite a passionate debate. As you can tell from the first 3 links that I stumbled upon while googleing, many people are very against whole life for some very valid reasons:
After a bunch of research and some lengthy talks with a few insurance professionals, other parents and my husband, I decided upon a mix of a 30 year Term Policy and a Whole Life Policy to make up my life insurance portfolio. The difference in price is huge! ~$20/month for the Term and $195/month for the Whole. However, I am happy with my decision for the following reasons (Note: not all of these are purely financial, some are emotional):
- Guaranteed insurance Now that this policy is in place, it is guaranteed for the rest of my life. I feel better knowing that I will *never* have to take another insurance physical. I am lucky that generally speaking the women in my family are healthy and I have no illnesses now, but, you never know what the future has for you. So, if for some reason I may still have a need for insurance when my 30 year term expires and I can’t get a reasonably priced policy due to my health, I will still have this whole life policy.
Also, my whole-life policy has an “accelerated death benefit rider”, which will give me access to a large portion of the death benefit during my lifetime if I have a terminal or chronic illness. (This is getting depressing but after going through this process I have a better understanding of why people do not like to discuss this stuff and put it off)
2. I am already maxing out my 401(k) With the cash accumulation benefit, sometimes a whole life policy is sold as another form of retirement savings. However, I am not viewing it as such. I am actively maxing out my 401(k) plus putting aside a little into my IRA (goal for 2017 is to max out both!) I am very aware of the problems with considering your Whole Life insurance as an investment vehicle with “guaranteed growth.” The investor in me balks and has such a gut reaction of disgust to anyone who utters the phrase “guaranteed” before anything investment-related. Don’t we know better than that now – hello, Bernie Madoff?
3. Forced Savings Even though our savings rate is well above the average American family, I like that this seems like a bill I am paying but it is actually benefitting me directly. THe $$ isn’t totally gone each month like the term policy payment is. I genuinely feel like I am “paying myself first” when this bill is debited from my account. Notice I wrote “feel.” I know this is not the same as when the funds are deposited into my 401(k) or when money is moved into my cash savings account. However, I know that the current “pain” of not having that ~$195 will feel better when I know I have a little nest egg in the form of the cash accumulation portion of the policy.
4. Ability to borrow against In the spirit of full disclosure, last week I reached out to my insurance agent to discuss possibly terminating this Whole Life policy. I recently started a new job that offers more insurance than my last job. I was thinking it might make more sense to put this almost $200/month into my daughter’s 529 plan. However, she reminded me of one of the benefits I originally found intriguing, the ability to borrow against it for any reason, including paying for education. I am not sure what the next 18 years will have for us, but one of my financial dreams is to pay for my daughter’s college education. Therefore, I am happy to know that if need be, this is another source of funds that I can tap into to pay for her education.
5. Can cash out if needed We currently have a healthy savings account and other investments to tap into of needed. However, we do not have a crystal ball to know what the future will bring. If I need to access then funds then I can always cash out. This will do 2 things: provide me with an influx of cash and by cancelling the policy I will decrease my monthly expenses and therefore free up cash as well. Also, after a certain number of years, the dividends paid in the policy will cover the premium. This will cause the cash value to not grow as quickly but you will decrease your monthly expenses while still maintaining your death benefit. This is something I plan to take advantage of when the time comes
6. Want the ability to leave something to the kids/grandkids(?) Again, this is very personal. My current plan is to only use this for its death benefit. (I guess it is technically for my family to use and not me…). If something happens while the kid(s) are young, it will be used to pay off the mortgage and go toward college expenses. When we are old, the goal is to have everything paid off and have successful and self-sustaining kids. However, I still want to be able to leave them something. As someone who has not received an inheritance and as someone who will probably never receive an inheritance, I am not sure where this desire comes from (perhaps another post) but I know it is something I want to do and I feel like this is a vehicle that will help me reach both of these goals (The term life will not cover this b/c I am an optimist and would like to live longer than the 30 year term!).
7. I have already have a diversified portfolio of investments I would NOT recommend this product to a newbie investor or someone who does not have some of the personal finance basics a la emergency savings, 401(k), taxable investment account and so on and so forth. I hope that the above items show that I had very specific reasons for purchasing this type of policy.
Those are the reasons why my insurance portfolio has both term and whole life components. I really hope I haven’t lost any would-be readers over this point of view!
If this will be a monthly burden, do not purchase this as you need to own for a number of years before you reach a break even point on the cash accumulation. On my own personal balance sheet, I am viewing this as a liability not an asset and certainly not an “investment” now.
So, have I lost any and all credibility? What do you think about my reasons? Are any of them valid?