7 Reasons why I have a Whole Life Insurance Policy

Buying life insurance is NOT as fun as buying an ice cream cone
Buying life insurance is NOT as fun as buying an ice cream cone

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:

https://momanddadmoney.com/why-whole-life-insurance-is-a-bad-investment/

http://www.daveramsey.com/blog/the-truth-about-life-insurance

http://whitecoatinvestor.com/8-reasons-to-avoid-whole-life-insurance-and-4-reasons-to-consider-it/

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):

  1. 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?

Thanks,

Jess

Learning about Life Insurance

How to know you are an officially an adult…

 So, I never realized how controversial the Whole Life vs. Term Insurance question was before I started researching both last year.  And, my oh my, after hours of googling, I now firmly believe that having a passionate opinion about Life Insurance is literally the definition of “adulting.”  For those of you who haven’t scoured the web looking for information on life insurance, let me give you a little background on why I was looking for life insurance and what I found.

Last year, I was pregnant with our first child and I had an obsessive compulsive desire to get my insurance house in order. (Normal pregnant people get the “nesting” drive to get their homes clean and orderly, I had an intense need to get my financial “house” in order.)

As I mentioned in a previous post, my husband and I have a few investment properties as well as the home we live in – all of these properties have mortgages at this time.  The investment properties’ mortgages are easily covered by the rent or in a tough situation they can always be sold (at least in the current market  – I understand that the market can dry up i.e. 2009 & 2010 but I’m not considering that extreme example for planning purposes) so I feel relatively confident that in the event I passed away my husband would be able to deal with those properties.  However, we have a 15 year mortgage on our home therefore those monthly payments are a little on the higher side.  With our daughter on the way, I wanted to feel confident that if anything were to happen to me, my husband would have enough $$ to pay off the mortgage and cash for her college education.

Now, these are my own very personal goals – it literally helps me sleep better at night knowing that these 2 things will be taken care of if I am not around. I am in no way advocating that one should be expected to cover these or other items. However, you might have other items that you would like to provide for if you should pass away unexpectedly or prematurely. One of the main things I learned through my insurance research is that everyone has their own level of comfort with insurance and it definitely is a very “personal” aspect of personal finance.

I did not really understand much about insurance other than the employer sponsored plan that I had at the time, which was only 1X my base salary.  So before contacting our insurance agent, I did a little digging to better understand what the main life insurance options are.  Without further ado, here is a quick summary of them both:

Term Life Insurance:

  • Life insurance that pays a benefit in the event of the death of the insured during a specified term (ex: 10, 20 or 30 years).
  • Fixed payment on a yearly or monthly basis
  • After the term expires, no more payments and no more benefits
  • No accumulated cash value
  • Can not borrow against it
  • Significantly less expensive than Whole Life Insurance
  • Why someone may want to purchase: In case you need a large face value for various big ticket items such as paying off the mortgage for a spouse if you pass away, providing for your children who are counting on you or covering for a business partner that may need to reduce debt.
  • Why someone may NOT want to purchase: You don’t have the discipline to save individually, you have reason to believe that you may want insurance for longer than the terms listed above

Whole Life Insurance

  • Sometimes call “Permanent” insurance
  • Life insurance that pays a benefit on the death of the insured and also accumulates a cash value
  • Fixed payment on a yearly or monthly basis
  • Provides lifelong coverage
  • Includes an insurance and an investment component
  • More expensive than term
  • Gains grow “tax-deferred”
  • Can borrow against the policy
  • Can surrender the policy for the cash value
  • Can be used for retirement
  • Why someone may want to purchase: Someone who is looking for accumulate a cash value, someone who wants the peace of mind knowing that they can have this policy for their entire life, someone the is looking for “forced” saving
  • Why someone may NOT want to purchase: Someone with the discipline that can save and invest on their own, investments do not grow as quickly as if they were individually invested, high fees, cash accumulation does not equal the amount invested for many years, lack of transparency.

Of course these are just very high level bullets and summaries of each.  If you have any interest at all, I would highly recommend taking some time learning more about these products.  Here are some helpful sites to give you a general overview:

http://www.iii.org/article/what-are-different-types-term-life-insurance-policies

https://en.wikipedia.org/wiki/Term_life_insurance

https://en.wikipedia.org/wiki/Whole_life_insurance

http://www.lifehealthpro.com/2013/06/19/whole-life-vs-term-theres-a-clear-winner-here?t=life-sales-strategies&slreturn=1475694799&page=3&page_all=1

Do you have life insurance? If so, what kind? What are some of your reasons for buying it? Any preferences for Term or Whole?

Thanks,

Jess