6

Most of what I read says, "whole life insurance is not for you", but they don't elaborate much more than that. There's even less about term life insurance that has an option to convert to whole life insurance. Are their benefits to purchasing term life insurance with an option to convert to whole life, and what type of consumers should purchase it?

I'm aware that financial advisers receive high commissions on whole life insurance, and that you can receive better rates of return on many other investment vehicles.

  • Term life insurance policies are usually for periods of up to five years, while most people need insurance for far longer than that. More important than an option to convert to whole life is the question of the rules regardng renewal of the term life policy. Does renewal after the (five-year) term require another medical exam, or is it renewable without a medical exam? Even in the latter case, are the premiums for the next five-year term set now, or will they depend on what rates will be offered five years down the road based on the underwriting experience over the coming five years? – Dilip Sarwate Sep 29 '14 at 2:25
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    @DilipSarwate: Multiples of 5 years maybe. 20 year term is the most popular by far and I've never heard of having to renew them every 5 years either. – AbraCadaver Sep 29 '14 at 19:20
  • @AbraCadaver If the 20-year term policy has the same annual premium for all 20 years, then you are overpaying for protection in earlier years and underpaying in later years. The shortfall in later years is "covered" by the interest generated from the extra premiums of your youth. If you cancel the policy before 20 years, you will have overpaid quite a bit. If the annual premiums increase each year (or every 2 years or every 5 years etc) to amounts stated in the policy, then you have renewable level-premium term insurance exactly as I described: no exam and premiums specified in the policy. – Dilip Sarwate Oct 3 '14 at 2:36
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    @DilipSarwate: Exactly, so if 5 or 10 years after you get the policy you get cancer (or a thousand other scenarios) you are now un-insurable. Glad I have the 20. Add to that, for a fairly young, healthy non-smoker get 1 million for $100 per month or less. That's not bad. – AbraCadaver Oct 3 '14 at 4:12
  • @AbraCadaver You still don't get the point, do you? Anyway, congratulations on your decision to get a 20-year level premium policy and for not smoking. – Dilip Sarwate Oct 3 '14 at 18:21
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Whole Life is just an insurance product and an investment product wrapped into a single package. The only advantage is that since you're forced to make payments to maintain the insurance, you're forced to invest. It's really just the "Christmas Club" or payroll-deduction idea, though it tries to claim otherwise.

If you're unable to make yourself set aside money for the future without that pressure, this advantage may have some value. Otherwise, probably not.

And there are significant disadvantages. You're giving up the ability to control your own investments, and paying for the convenience of not having to (or being able to) think about them. Not just in the agent's commission, but in paying a relatively high ongoing rate for the investment "brokerage" service -- and keeping those fees low would make a significant difference in actual rate of return, which compounded over the years can make a large difference in actual earnings.

There's no free lunch. The insurance companies offer this because it makes a profit for them. That profit can ONLY come out of your pocket.

6

Amen to what keshlam said. Whole life is sold to make a commission; term insurance is bought to protect your family.

Whole life, or term & paying more for option to convert, is a relatively expensive investment. Big commissions, up to 40%. Only worthwhile in unusual tax situations. If you're in one of those, the team of tax consultants and actuaries in the law firm you've retained to manage your assets will advise you. And I wish your chauffeur, butler, housekeepers, security team and estate manager well.

The biggest disadvantage of whole life is this: for someone who has young dependents, you need a LOT of life insurance, ~ $250k per dependent, so for two young kids and a nonworking spouse, minimum $750k. Folks in that situation usually don't have enough cash flow/income to buy enough whole life to protect their family. So whole life diverts attention from the real question about life insurance: if you die, who starves? If the answer is "Nobody," you don't need it at all.

Term is pure insurance: you're hedging against the possibility you'll die and your kids will go without; the company bets you won't, and sets the odds a little or a lot in their favor. SBLI or insurance thru your alumni association, or thru NW mutual is often the best deal. Look into disability, too. You're 3x more likely to have a period of disability than die.

So tell the salesman "thanks, but no, thanks" and buy SBLI/alumni association life insurance if you need any.

Much better investment is 401k or IRA- if you put away $1000/yr for 10 years starting in your 20's, that's probably all you need. Magic of compound interest.

See "the only investment guide you'll ever need" for an entertaining discussion of finances.

  • +1 for that book recomendation. Old book, a classic. – JoeTaxpayer Sep 28 '14 at 23:04
  • I assume you're "3x more likely to have a period of disability than die" prematurely, like under 50 or something? – Joe Sep 29 '14 at 1:09
  • +1 for "if nobody starves, you don't need life insurance". If you feel a need to protect yourself in that case, you might want to put the money into better liability or health coverage. – keshlam Sep 29 '14 at 16:37
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    I suspect you mean $1000 per MONTH for 10 years. – Josh Anderson Oct 13 '14 at 10:51

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