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