A few months ago I announced one of my financial goals as being getting whole life insurance. About a month ago, I announced that with my extra money, I decided to buy whole life insurance. Many people questioned my decision to get whole life insurance and so I figured I would try to explain my reasoning for getting whole life insurance. As it turns out, most (if not all) financial bloggers are strongly against whole life insurance. While I recognize that I don’t get clear disclosure on the commissions and/or fees included in the plan, I still think whole life insurance was a great option for me, considering my motivation for getting it.
My Motivation for Getting Life Insurance
If not already obvious, part of the motivation for getting life insurance was to protect my wife in case something were to happen to me. While I often talk about how my wife now makes more money than I do and that we currently live off of her income, I would hate to think of my death being as a financial burden to her. Because she has a stable income and career, I don’t need a high death benefit that a low premium term life insurance would provide. There’s no point in paying for something that I don’t need, right?
On top of the expected security that any life insurance plan would offer, I don’t like the idea of paying money for something that I could lose. In other words, I don’t want to waste my money on a short-term life insurance plan and then survive past the length of coverage (as I expect to) and regret paying that money. I understand the benefit of term life insurance, but seeing as I don’t NEED it, I opted for whole or permanent life insurance. Now that I have whole life insurance, my second life insurance plan will probably be to get some cheap term life insurance.
As I will attempt to parse out in more detail, whole life insurance gives me an immediate death benefit (should something happen), while also giving me a flexible, tax-deferred investment vehicle. There are many more benefits that make this the right choice in my eyes. I don’t think this is the only investment that one should make, but it definitely deserves to be an important aspect of any well-diversified portfolio.
Benefits of My Whole Life Insurance
I decided to get my whole life insurance plan through Northwestern Mutual. I could go into the details of choosing this life insurance provider, but suffice it to say that I liked their reputation, which includes their history of investment returns, structure of the organization being a mutual company, and just plain image. Because I decided to get my whole life insurance with a mutual company, I know that it exists to meet my needs – the policy holder.
Guaranteed Protection: No matter at what age I die, my life insurance plan will be there. A side benefit of getting it this earlier is having a lower premium because of my prime health (and young age). If I were to generate some serious illness or condition in a few years, it would be hard to find an affordable plan. I also don’t have to worry about premiums ever increasing because I have “locked in” the premium early. As I mentioned, the money that I am paying into the plan is not being wasted because it is whole life – the death benefit will always be there and there is a cash value on top of that.
Dividends/Cash Value: My whole life insurance plan provides a dividend, which I will use to increase the cash value of the plan. This is a major factor in the appeal of the plan. While it is a conservative return, if I live to age 64 (for example), my average rate of return on my premiums is anticipated to be 7.02%. Not bad for a secure investment, right? Especially when you consider that it still gives me a death benefit for my wife right now should something happen.
Flexibility: Another added benefit to my whole life insurance plan is that it offers flexibility. With the added benefit of a cash values, I can use this money for a variety of reasons at any time. I can use it to supplement retirement income (which is essentially tax free), or if I don’t need it, I can leave it there to continue to grow to supplement my death benefit. The dividend also offers further flexibility. While I plan on re-investing my annual dividends into the plan so that I can ensure maximum return, I could choose to use the dividend to pay the premium for this plan after about 10 years. In other words, if I went this route, I could maintain the death benefit and a small cash value without having to pay any premiums after 10 years (approximately). That doesn’t sound that bad either!
Ease of Diversification – The popular argument against whole life insurance is that I could take the difference between a term policy and invest it to get a better return. Yet, that fails to consider the money invested into a term life insurance plan if a person lives beyond the coverage term. More importantly, I find an anticipated return of approximately 7% to be sufficient for the immediate security provided for with the death benefit, while also providing a long term conservative investment that is matched with the death benefit (which never expires). Also, I am able to plan on this decent return without fussing with all of the effort that is required in finding/monitoring an investment that will give me better returns.