When does Whole Life Insurance Make Sense?

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July 11, 2018
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When does Whole Life Insurance Make Sense?

” I want permanent Whole Life Insurance.”

” I don’t want term where it only lasts for a temporary amount of time.”

” What happens to the payout if I don’t die within the term period (10, 15, 20, 25, 30 years)?”

” What happens to all the money I paid for my policy over time?”

These are only some of the common responses I get from clients when deciding between a whole life policy as opposed to a term policy. The million dollar question we will be attempting to answer today is… When does Whole Life Insurance Make Sense to purchase?

 

Sigh…. Where do I start?

 

You know what. I think I’ll start by saying that 80% of Americans  SHOULD HAVE LIFE INSURANCE NO MATTER WHAT AGE THEY ARE. This opinion includes the children we can see on GoFundMe who’s parents didn’t think it could happen to them. Now the families of the deceased are trying to raise the funds necessary to provide a proper burial for little Man-Man).

 

No one wants to talk about Life Insurance because it puts bad karma on their life. If they purchase it, they are now going to die before Jesus comes back to rapture them (yeah I said it!!!). It is a known fact (you can even ask Google) that 100% of the living… WILL DIE SOMEDAY.. We just don’t when that day will be.

 

After the previous rant,  I will continue explaining the difference between Whole Life and Term Insurance for those who may be unfamiliar with the terms.

 

Whole Life Insurance

Life Insurance that pays a benefit on the death of the insured and also accumulates a cash value. Thanks Google, I couldn’t have said it better myself. It is also permanent insurance that is guaranteed to be more expensive than the term option for the same coverage. The owner can borrow money from the cash value as tax-free income, and don’t have to pay it back until death. At that point, the unpaid money borrowed, plus any interest accumulated (if applicable), will be subtracted from the death benefit that will be paid to the beneficiary.

 

Term Life Insurance

Life insurance that pays a benefit in the event of the death of the insured during a specified term. Hence the keyword… Term. Term coverage is temporary. It gives someone a large amount of insurance, for  a fraction of the price they’d pay in the Whole Life Policy. Some use the term “Pure Life Insurance.” For example, me being 29 years old, in perfectly good health, can get a $1 Million dollar policy for roughly $80/mo. A whole Life policy for the same payout would cost me over $800/mo.

 

Now that we understand the difference between the two policies, let’s get back to the purpose of the Article…

 

When does Whole Life Insurance Makes Sense to Purchase?

There are a few things that I consider when determining if Whole Life is a good fit for my clients. Some of them are listed below:

  • How much are they contributing to their 401k compared to what their employer is matching?
    • If the employer matches 100% of the first 5% of the employee’s paycheck, and the employee is paying 10% per check.
    • If they are contributing more than the employer match, they can use that extra contribution and allow for the cash value to build up by paying it into an insurance policy.
      • This helps to offset risk of losing money in the stock market. It helps to achieve a relatively consistent, safe, and expected interest or dividend on their cash value. Some pros like to coin the phrase of the cash value as a “Bond Portfolio”. The returns are comparable to that.
        • Having security of consistent dividends or interest gives an investor the ability to be more aggressive in purchasing stocks in their retirement plan. The bond portion of a portfolio is already covered into the Whole Life policy.
      • You should never contribute less than the employee matching amount into an employee retirement plan.
        • Can’t beat a $100% return on your investment (i.e., Free Money).
  • Have you Maxed out your Retirement Plan Contributions for the year and are still Looking to Save?

    As this blog is being written…

    • The max yearly contribution for a 401k is $18,500 per year.
    • The max yearly contribution for an Individual Retirement Arrangement (IRA) is $5,500 per year, unless you’re over 50 years old, which is then $6,500/year.
    • If you’re still looking to save more for retirement and have maxed out those other retirement contributions, you may want to add more into a Whole Life Policy for additional supplemental retirement income.
      • Although this definitely doesn’t apply to the 80% of America due to income limitations, it applies to the other 20% of Americans as an option for additional retirement funding.

  • Is there an Insurance Need in the First Place?
    • Insurance is meant for the majority of Americans who don’t have the money that is necessary to support the same lifestyle for the lives they will be leaving behind in the event of their death (children, adults they support, education, mortgage, etc).
      • They may have a plan in place (work, investments, etc.) to support those lifestyles over the next few decades, but don’t have the money right now.
      • Life insurance can be treated as backup plan that is needed to ensure that the financial plan can continue, even if they are no longer there to fulfill that plan.
    • Whole Life helps to accomplish three goals
      • Lock in a Death Benefit
      • Save into the cash value that can be used for what ever purpose after the money has been built up over time
      • Pay estate taxes in order to transfer wealth from one generation to the next.
    • Life insurance is a great method that the wealthy use to transfer generational wealth.
      • They offset estate taxes that will be due upon the death of the owner of the assets.
  • How Have you Planned to Pay for Burial Costs?
    • As mentioned, there is a young person who passes away for what ever reason every day. Their parents didn’t think this could happen to them, so their was no insurance anyway.. Just look on GoFundMe for yourself.
      • Whole Life Insurance policies can be locked for newborns are early as 14 days old, for as low as $4.00/month.
        • Cash value will accumulate over their lifetime, being used for any purpose
        • They’d never have to worry about who’s paying for their burial costs.
    • Elderly with no life insurance can benefit from a cost-effective final expense policy to lock in funeral costs
      • Alleviates them from the idea of their funeral costs being a burden on someone else.
      • Don’t have to worry about outliving the policy term.
      • More lenient with typical health conditions that are common as you get older (diabetes, high blood pressure, etc.).

To Recap

For the majority of America, median income is about $54,000 per household; according to NerdWallet.com. Term Insurance is a much more cost effective option. The extra money you would contribute to a whole life insurance for the same coverage could be adding to an investment that would be much cheaper than the cost of investing within a whole life policy.

Whole Life is best suited for:

  • The extremely young
  • The relatively older with a few health conditions who don’t have an existing policy already to cover burial costs
  • Those who are on the wealthier side and have maxed out their retirement plans, but still want to contribute more money for their retirement income.

In addition, the next question is for parents who are just getting started with home ownership, kids, careers, and education. How are you going to be able to equip your family with enough insurance to support your family if you’re not there to keep working? Term is the recommended option for those who are at the peak of their lives and have a lot of responsibilities to cover.

 

It’s a lot to think about… I have a headache just by writing this article and I’m a financial advisor. Imagine the level of difficulty for the average person just trying to protect their family.

 

But I will close (in my pastor’s voice) by leaving you with this one question/answer….

 

What do you think is you’re biggest asset?

 

It’s not your house… Not your car… Not your kids…. But it’s YOU!!! You’re ability to make money and provide a lifestyle for your family to live the way you planned or intended.

 

Either get some coverage immediately or contact one of our advisors to review your policy to ensure you have the right plan for you and your family.

 

 

 

Dez
Dez