Whole vs. term life insurance

[Tiderunner]

I recently sat down with a financial advisor and one of the things discussed was purchasing whole life insurance. My old man says it's a scam and not worth it, all I need is term a few years down the road. Any input?

Dylan Porter

 

[phrogdriver]

You need whole life at some point, for the simple reason that you're going to die someday. Term is just a wager between you and the life insurer--you bet that you're going to die within the term of the policy, he's betting you're not. At some point, i.e. when you get old, no one is going to take that bet. So, you're stuck at 80 years old, with nothing but the 10K policy Ed McMahon, or by then, Kevin Eubanks, sells on TV. You want to pass your trash on to your kids, but they have to pay 50% taxes to get your lean-to and '89 Escort. By buying whole life some years earlier, you have a buffer to protect to value on your estate, since you can keep your policy for the rest of your life. Now, whether you need to buy that NOW, like the (I'm sure it was) First Command rep says, is a different question. Assuming you are single and reasonably healthy, you can probably wait until you get hitched and/or have children. My 2 cents.

Phrogs phorever

 

[AG7412]

Most insurance agents that aproch you while in the military are just after one thing, YOUR MONEY. Talk to your command financial specialist and determine what exactlly are your needs for insurance and then shop around for the best deal.

 

[Tiderunner]

Yeah I think I'll shop around, but like phrog said, I think I could hold off until I get hitched and hack away at some of my debt.

 

[webmaster]

One of the other things to consider is that many insurance providers don't specifically cater to the military, and have two clauses in them that can exlude or limit the amount of $$ your beneficiaries will recieve:

- war clause
- aviation related duties (ie a pilot or aircrew)

In the event you died doing either of those, the insurance company can either not pay your beneficiaries or pay a reduced amount. That is of course why SGLI (servicemember's group life insurance) that you can get is one of the best "sure" thing deals. I know, I know, some of you out there say you can get more coverage for the same amount per month, but the security in KNKOWING your beneficiaries are going to get something if you die somewhere far away in the service of your country...

Also, what exactly are you using the life insurance for?

- Term: You are young, have kids or a growing family, and want to take care of them in case something tragic happens. Ie, you are the family breadwinner, spouse is taking care of the little ones. Worst case, that $$ will provide for them, and it is MUCH cheaper than whole life. Also, don't forget insuring the SPOUSE! What happens to you and the kids if something happens to HER!

- Whole life: You are locking in the cost of the policy at a certain age, and are using the $$ placed in it as a savings vehicle. IE, you can take the money out after XX number of years, for example you reach 65, maybe there are penalties, or maybe not, depends on the particular company you go with. Advantages can be in terms of spreading your portfolio around and diversifying. Not my personal #1 pick for an investment vehicle, but it is an option.

It all boils down to what security you are looking for. Here is some information on probably one of the best (IMO) deals you are going to find around for the military member, you can also go through other banks like USAA:

Navy Mutual Aid Association
Permanent Plus
http://www.navymutual.com/services/lifeperm.htm

Permanent 'Plus'
Recommended for members, spouses and children.

Permanent 'Plus' coverage can be purchased in $10,000 increments with a minimum of $20,000 up to a maximum of $750,000 per insured (children's coverage limited to $100,000). The coverage remains in force for the life of the insured and premiums are paid for a period of time selected by the policy owner/member. Premiums are based on the insured's age at issue and smoker/nonsmoker risk classification.

Key features of Permanent 'Plus'

• Tax deferred cash value growth
• Permanent death benefit
• 75% of cash value available for loan
• No war clause
• No front end loads, no surrender charges, and no commissions
• Guaranteed Insurability Option
• Long Term Health Care Option

Building Cash Value: When a premium payment is received it is deposited into the member's current cash value account. Every month the account is charged for the cost of insurance and the balance is credited, with interest. The crediting rate is revised annually, and is currently 7.25%, effective January 1, 2003.

When the cash value builds to an amount sufficient to support higher insurance values, the death benefit increases without any increase in the premium.

 

[johndd321]

Even though this is an older post, we need to set the facts straight on life insurance.

Term is the best option for most people. 35-45% of people drop their whole life insurance in the first 10 years. These first 10 years are when the majority of the commission is charged causing people to lose money. Here are some other reasons not to buy whole life insurance.

1. Insurance protects you from financial catastrophe. In your working years, people are relying on your income from you job. You could die and leave your kids and spouse to pay for debt and college. That is what life insurance protects you against. When you retire, you should have no debt and you are living off your pension, Social Security, and any other retirement assets. No one is relying on a job and thus you need no life insurance. In most cases, if you have a good retirement and no debt, you only need term until you retire.

2. One argument is that cash value insurance will pay for your estate taxes. Only about 2% of estates have to pay taxes in a given year. In addition, there is the estate tax exemption. You can pass $1,500,000 to your beneficiary’s tax free in 2004 and it goes up in increments to $3,500,000 in 2008. After that, it will depend on Congress. If Congress does nothing it reverts to the $1,000,000 exemption. An interesting thing is that you and your spouse can use bypass trusts, with the aid of a professional, to pass $3,000,000 tax-free to your beneficiaries this year and it will continue to go up every year until 2008. You can also pass $11,000 to a beneficiary each year you are alive to reduce your estate. So unless you are very rich you do not need whole insurance for estate planning.

3. Another argument is that if you get poor health you might not be able to get term insurance so get whole insurance now to guarantee insurability. The problem with that argument is that you can get term insurance guaranteed until you are at least 65. You do this by getting annual renewable term insurance. You will always stay insured and you do not have to take a health exam after you have started your insurance. You term will rise little by little every year. You will end up paying more then level term, but I will show in a minute that it is still cheaper than whole life.

Also, your SGLI insurance can be rolled over to VGLI once you leave the service so you do not have to worry about your health keeping you from being insured. Your spouse’s SGLI cannot be rolled over.

You can also get term insurance with the option of converting it to whole insurance in the future. This would only be good though if you have really bad health and that is your best option.

4. Another argument is to buy whole life for the tax-deferred benefits. That is a bad argument because you should look at what option gives you the most money in the long run. Max out your Roth IRA and TSP (both shelter you from taxes) before you think about whole life insurance. Whole insurance charges you higher fees each year than a Roth IRA or TSP. In addition, many tax advantaged index funds would be good competition to whole life insurance. Unless you invest in Variable Universal life, (insurance that allows you to invest in the stock market) your cash value insurance will not be able to beat stock mutual funds. In the long run, stocks do a lot better than bonds and regular whole life insurance is not invested in the stock market. You would be better to buy term insurance instead of whole life insurance and invest the difference. You can only borrow cash from your whole life insurance. If you do not return it, you could risk having the policy lapse or you have to reduce the amount of your insurance.

5. Do not forget that the whole insurance you buy now will not be worth much at 70 years old because inflation will erode it away. You will have to add additional increments to the insurance and this can be expensive. Many people add term to their whole life insurance in this instance if they are still insurable.

Now for the proof that term stays cheaper than whole for a long time.

Since we are all familiar with USAA, I will use their rates. Here are USAA’s monthly rates for a male's annual renewable term policy starting out with good health. Unfortunately, they only show it going to 40, but I can fix that problem.

Male
First Month Premium:

Base coverage
Age 50,000 100,000 150,000

25 8.92 10.84 14.08

30 9.00 11.02 14.34

35 9.57 11.80 15.52

40 10.84 13.64 18.28

Here are their rates for whole insurance for a male starting out at good health. USAA is probably one of the cheaper companies.

Male
First Month Premium:

Base Coverage
Age 50,000 100,000 250,000

30 49.95 92.57 220.27

40 77.69 145.50 348.68

50 114.00 213.93 514.05

60 185.58 351.48 847.87

70 372.22 708.30 1713.24


If you get on USAA’s website and do a what if scenario we can see how much term would be past 40. If we assume the same favorable rates that the above quotes use (good health and conditions) at age 50 you would have to pay $28.43 a month for a 15-year level term of $100,000.

So you are paying cheaper for annual renewable term from your 20s to your 60s plus you will have more money since you invested the difference. That is why term is a better life insurance for most people.

 

[BigWorm]

Navy Mutual Aid Association
Permanent Plus
http://www.navymutual.com/services/lifeperm.htm

Anybody have any experience with that specific policy? It is the one I had on the backburner for when it makes sense to buy it.

 

[Ouch]

Re

If I am not mistaken, Navy Mutual Aid is the only Insurance provider outside the VA that the CNO has give the thumbs up to. Someone check me on that, please.

Whole life is good for one thing and one thing only: children. You can take a whole life policy out on a baby, have it turn over when the kid is out of college, then it has insurance coverage and if it is written well, he'll never have to pay a premium again. This isn't saving for college or some other savings vehicle at all. This is just a way to save your kid life insurance premiums. I don't even know if this strategy is worth the cost. My parents did it for me and it worked, though.

Whole life is good only to cover final expenses. If you could look forward and see how much you will need at the time you die, and took out a whole life policy for just that amount back when you were young and healthy, you would be saving money. Who can do that, though?

Also, if you are a ridiculously rich guy...but that was already explained. So 3 things good about Whole life...

The best insurance is SGLI and Family SGLI while you are active. I don't know anyone who needs more. Depends on your family, though.

 

[johndd321]

Starting whole life for children is an interesting way of looking at it. I had never considered it. Ouch, could you find out if that is cheaper than paying annual renewable term starting at age 22 and ending at age 65? I am afraid your parents probably had to pay a lot more every month to build cash value that would pay your premiums for you, which might have made that route more expensive. How long will your cash value support this?

I know many advisors recommend not buying life insurance for your children because they have no real income to insure. If a child did die, it would not be a financial catastrophe because you could afford their funeral.

My biggest argument is why buy whole insurance if you do not need life insurance after you retire. Your nest egg will be used for your funeral expenses and for your children’s inheritance. You can use trusts and the estate tax exemption to avoid taxes on the inheritance.