Dazed + confused? It's not just you. Millennials come to us all the time, looking for a little bit of guidance + advice when shopping for life insurance. Nine out of ten times, they are being sold a Whole Life Policy. It's almost become a joke. When you're young, it's cheaper to buy and then you're set for life, not to mention that you are building a mini savings account within the policy for you to tap down the road.
So the rationale for buying a Whole Life policy when you're young is sound, or is it?
When Do I need Life Insurance?
First of all, you don’t really need to start thinking about life insurance until you have people in your life who are financially dependent on you. Also, you may not need to have coverage to fully replace your financial contribution because in the event that you die, it's likely that your dependents may make some lifestyle changes. For example, a married couple with two cars, probably won’t need two cars if something happens to one of them. A good financial planner can help you access how much coverage you need. Once you've decided that it's the right time for coverage, there are two main types of policies to chose from: Whole Life + Term Life.
A Term Policy is your less expensive route. You'll pay a much smaller premium, maybe a couple hundred dollars a year, and for that you are protected for a specific time period (10 yr, 15 yr, 20 yr. term). In the event you die during the term, the policy pays out a specific amount to the people you named as the beneficiaries (recipients). If you stop paying the premium before the term is over, the policy lapses (essentially it gets canceled) and you’re left with no coverage. If at the end of the term you are still alive, you can either decide to renew the policy for a new term or hopefully your own STASH is big enough to cover your future expenses that you no longer need the protection. The idea is that 20 or 30 years from now, if you’ve been disciplined with your savings, your retirement accounts and personal investment accounts should be large enough to support your dependents if something were to happen to you.
WHOLE [PERMANENT] LIFE
Where a Term Policy lasts for a time period usually less than 30 years, a Whole Life Policy is an insurance contract that typically lasts 100 years, which is why it's also known as permanent life insurance. The biggest difference between a Term and Whole Life is that Whole Life is much more expensive, but some of the money you pay annual (the premium) goes into a savings account in your name, that grows tax free at a rate typically around 4% annually. Over time this savings that you’ve accumulated can be withdrawn from the policy or even used to fund the policy premium every year. Side note (in case it comes up): for certain wealthy clients a Whole Life policy is an additional vehicle to use to shelter money from taxes.
There's no getting around it, a Whole Life policy is expensive. There are a lot of fees and a hefty commission that goes to the insurance agent who sells you the policy. Here's what we USUALLY tell most of our H.E.N.R.Y clients:
1. If you are disciplined enough to save money on your own, go with a Term Policy.
2. Put the different between the Term premium and the premium you would have paid on a Whole Life policy into an investment account.
3. Invest this excess savings in a diversified portfolio and you’ll come out ahead in the long run.
If you aren’t disciplined to hold yourself to this savings plan or if your situation is more complex from an estate planning perspective, then a Whole Life policy may be the better option for you.
And if you're still not sure, give us a call!