One of the most common questions about life insurance is whether you should you buy term life insurance or whole life insurance? This article gives some reasons why whole life insurance may fit your needs better than term life insurance. As always, consult with a financial planner.
I want to be honest and upfront, I did not come up with this post on my own, it was inspired from Neal Frankle’s guest post on this blog titled, “How Much Life Insurance Do You Need?” Neal wrote a great article about term insurance and how whole life is usually inapplicable stating,
- Only buy term life insurance for income replacement and family protection.
- Think of life insurance in terms of income replacement. How much income will you need and for how long?
Once you determine that, it’s easy to figure out how much you need to buy.
I think it is the word, only, that usually gets me going, but in a good way. It has inspired me to write 6 Reasons when to Use Whole Life Insurance. Why 6? Seems substantially more than 5, but less than those long 10 lists!
Reasons to Buy Whole Life Insurance
1. You have a Special Needs Child - The whole argument that your child’s need for a lump sum ends at 18 or 22 is completely and utterly thrown out the window. In fact, it should 1000% be placed in a Third Party Special Needs Trust.
2. You have a liquidity Issue with your Estate – Most people who owe a federal estate tax (the top 2%) or a state estate tax (a heck of a lot more people than 2%) usually don’t have the actual cash to pay for it regardless of how rich they are. Want a cool example? Well it is a cool example for everyone except Joe Robbie’s Family. In 1990 when he died his family was forced to sell the Dolphins because they owed $47,000,000 in estate taxes. Yes that is 47 MILLION that the federal government got a hold of.
3. You have a charitable intent – If it makes you happy to get your name on a building for the university or hospital of your choice, you can. And possible for very little out of pocket. Yup, you know what I am talking about…getting a permanent life insurance policy because your charitable intent will not be gone in 20 years. Additionally, depending on who owns the policy, payment of premiums may be an income tax deduction or upon eventual death an estate tax deduction.
4. You have family health issues – Most whole life policies have riders that allow you to increase your coverage without additional testing. This could be a huge reason for most people.
5. You want additional diversification – I’ll be the first to admit this isn’t a great reason, but this is one of the reasons I received for the purchase of another whole life policy from the client. He watched literally every investment decline in value while his cash portion of his whole life went way up (he is late into his policy). I would never use whole life insurance as an investment, nor should you buy it as such, but this particular man did.
6. You own a business and want to take care of succession during life – Picture this…you are running a business with a partner. The partner dies and you now share business ownership with his surviving spouse or bratty children. By using a buy-sell funded with a whole life policy, you could have bought their shares. You get a step up for half of your shares (boring capital gains stuff) and the partner’s family has the liquid dollars they need. Why not buy cheap term life insurance? Because hopefully your business lasts a long long time and now instead of being 50 and uninsurable, your whole life insurance policy lasts until a later age.
How much whole life insurance should you buy?
This is one of those areas where you need to examine your current and future financial needs before making a purchase. You will also want to examine policy and free insurance rate quotes before making a purchase.
You can find more free life insurance rate quotes here: New York Life, HSBC Life Insurance, Smart Life Insurance, US Insurance.
Disclaimer & little about the Author: I do not have any whole life insurance, but hope to purchase some by the end of the year. The reason I do not have any is because I am currently ridding myself of all consumer debt. As I have indicated on My Journey to Millions I am licensed to sell life insurance in the State of New York, and will be licensed to practice law in the State of New York in two weeks. Check with your financial or legal advisor before making any decisions.
This is a guest post from “My Journey” from My Journey to Millions. My Journey to Millions offers his readers basic financial planning advice all the way up to advanced estate tax planning , while tracking his journey from debt to Millions. If you like the post please subscribe to his feed.
{ 8 comments… read them below or add one }
Whole Life insurance also provides a pool of emergency cash that can be borrowed against if you have built up enough cash value.
DDFD: I would be careful there, as there are usually fees involved with cash withdrawals.
DDFD,
I couldn’t agree more with you, but when writing this post, I wanted to give ALMOST bullet proof reasons as to force people to think outside the box when they hear that all whole life is evil.
@ Ryan depends on who you have it with . . .
There will be interest on the loan, but it is usually more favorable than borrowing from a 401(k). 401(k)’s usually have limits on loans and they must be repaid or they are considered distributions. Life insurance loans don’t need to be “repaid,” the outstanding loan is simply deducted from the death benefit payment.
Finally, it should be understood that significant cash value takes a few years to build.
You can custom tailor whole life policies to build cash value quicker than you think and not have it become a MEC. You can use this cash value as your own bank….instead of paying someone else the interest (read finance company) you pay yourself the interest. Thousands of people do this already and they are better off financially. Proper use of Whole Life, that is set up correctly, can literally save people mounds of money over their lifetime. And it can be used as self completing plan…..ie if you become disabled no 401k is going to pay for the funging…..transfer wealth to heirs, charities…as mentioned above. In fact if people knew the secrets of whole life you could buy it in a vending machine and there would be know need for agents.
DDFD,
Depending on the company you are working with, return of premiums can be guaranteed after 10 or 12 years. So even if you want to walk you can.
I too get upset when I hear people saying whole life insurance has no purpose or even Dave Ramsey’s claims that it is a rip off. First of all a product that is designed for a purpose does not inherently rip people off. The agent who sells it for the wrong reason or the company that has hidden fees rips people off, but whole life insurance is term life insurance with a really long term. If you have long term risk to insure and someone sells you a 20 year term policy with rates that skyrocket after the 20th year then that is a ripoff. Yeah, I said. Term insurance can be a rip off too.
In terms of loans with regards to cash value I think it is important to bring up non-direct recognition. This means that when you take a loan the amount of the loan is not directly deducted from your cash value. This allows the full amount of cash value (loan amount included) to continue to participate in dividends. This would eliminate the biggest expense of a 401k loan, opportunity cost.