Just when you thought my posts couldn’t get any racier, I'm going to discuss the glamorous, exciting world of life insurance. Like flossing, it's not fun or glamorous, but it has to be done. Before you start snoozing, read the rest as it could save you a lot of money.
First, I'm lumping Whole/Universal/Variable together under the word "whole." I define "whole" life insurance as insurance you have UNTIL YOU DIE versus Term life insurance, which you have until the term is over OR you die, whichever comes first. If you have specific questions on Whole/Universal/Variable, email me by just responding to this post.
Term Life insurance provides a benefit to your beneficiary IF you die during the TERM of the insurance policy. You buy Term Life for INCOME REPLACEMENT in the event of your UNTIMELY death. Typically, you would want the term of the policy to be:
- During the time your minor children are economically dependent on you;
- Before you retire, if you have a spouse that depends on your income; and
- Possibly into the early part of your retirement if you still have a mortgage to pay off.
Typically, a married person with kids would buy term life insurance around when they begin having children and would buy it for a term of 20-30 years. It’s generally sold in 5 year increments. If you are in generally good health and a non-smoker, it is far less expensive than Whole Life insurance. It provides the security your family needs until either your kids are launched or you retire. Your retirement takes care of your surviving spouse. Both spouses should have some Term life income replacement until retirement.
Whole Life insurance pays the beneficiary WHEN you die. We will all eventually die. Hopefully, we will be very old when we die. If you die while in retirement and you’ve saved appropriately for retirement, there is NO NEED for income replacement upon your demise.
Aside from making for excellent motives in film noir movies, why would anyone buy a Whole Life policy for themselves or their spouse? There are only two solid reasons to seek out Whole Life insurance and do not let some broker who makes a huge commission selling Whole Life insurance convince you otherwise:
- You have a child(ren) who is disabled and will never be economically independent.
- You have SO MUCH MONEY that your children may face a huge inheritance tax bill when you die and you want them to have some cash to pay uncle Sam when they inherit (so sad for them…)
If you cannot tick the box for either of those two, you DO NOT NEED Whole Life insurance. Yes, brokers will tell you about estate planning and whole life's investment quality and that you can sell it face value whenever you want, but in most cases it would still be better to invest that money directly yourself than try to get some return from a Whole Life policy.
Here’s why: Insurance companies do some math that I won’t bore you with to arrive at a “face value” number. They use a number called a ‘discount rate’. Calculating discount rates is more art than science, but suffice it to say, they set the discount rate so that it benefits THEM not YOU.
As for estate planning, if you planned well, your children will inherit what you saved and invested wisely (and didn't use in retirement). BTW, I feel the same way about annuities, but that's another post.
In general, most people need term life insurance for the time their kids are at home and before they are living fully off retirement benefits. They need enough for income replacement (I will do another post on how much you should have) and they DO NOT NEED Whole Life insurance.