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.
Here are a few concerns with Whole Life Insurance:
1. Your premiums are more than that of Term Life for sure.
2. You are estimating your returns to be about 7%. As we have seen in the last few years, most investment returns were in the negative territory. What happens then? Do you owe them money? Can you take your money out? I don’t think so.
3. You are stuck with whatever the insurance company wants to invest in.
4. What happens if you are unable to afford your premiums and decide to change your insurance policy to a cheaper option?
Thanks Tushar. I realize it’s not perfect, but it still does offer me a lot of benefits. To answer some of your questions:
1- Yep, I recognize that, but there is some security knowing that I have locked it in when I’m young and I have it no matter what.
2- I don’t have the material in front of me, but these figures were based on historical trends of what NWM has been able to pay over the past 30 years. There is also a guaranteed cash flow as well. No matter what, I will have my death benefit and cash flow.
3- Yes, I am stuck with whatever they want to invest in, but this similar to any other mutual funds. Investing in a mutual fund can be a reasonable part of any portfolio because it gives you some diversification and it doesn’t take a lot of effort on your part to manage it.
4 – My premiums are $600 per year, so I will be able to afford them no matter what. I only HAVE to pay them for about 10 years, so I am okay with locking it in now.
Let me give you my financial planner’s point of view on insurance:
Let’s assume that you have 100K whole life policy.
situation #1: Let’s say you die in 2 years; having an insurance will definitely help your wife and potential kid. Congrats on being so responsible!
situation #2: But let’s say you die at the age of 50. All your life, you have been concentrated on paying down your debts, saving money aside and if you are lucky, you even have a pension plan. Do you think that an additional 100K would make a big difference in the picture?
Situation #3: How about you get a term life insurance for 20 or 30 years? with rough calculation, a T20 would probably give you 600K for the next 20 years for the same price as your whole life (it may be even bigger!). So consider that you die in 2 years; do you think that 600K would be a great help for you wife and potential kid?
Investment flexibility: the 7% estimated return is a… ESTIMATED. As EF just mentioned it, nobody will reimburse you if the 7% doesn’t happen. You have several investing opportunities to use (such as a 401(k)) so the additional possibility is good but not awesome.
How about that: have you considered cutting down your whole life by 50% and take a term life insurance for an equivalent premium?
Thanks TFB for the detailed response. I understand it’s not perfect, but it shouldn’t be criticized so quickly. The first thing to point out is that I don’t have a kid, so my death benefit doesn’t have to be that high. We also don’t have any debt and my wife is working a job that she could support herself with. I understand that the premium would be slightly lower or the death benefit significantly higher with term life, but it would only cover me for a particular term. As I understand term life insurance, your coverage ends and you get nothing. Why pay premiums on a plan if there is no guarantee if I don’t NEED it? If we want to talk about no guarantee, it seems like term life is the policy to bring up. I do have have a guaranteed cash value and considering the reputation and track record of NWM, I can expect more than the guaranteed.
The way I look at it…If I were to cut down my whole life by 50%, that would significantly lower the usefulness of the plan while also paying into a policy that I am probably throwing my money away.
haha. thanks Edward. I will have to look at that one later today. I’m not trying to suggest that this will give me the best return on my money, but that it is a safe, conservative thing to add to a portfolio.
Your point makes sense considering your situation.
You pay for a term life in case something happens. Like you pay fire insurance on your house. Chances are that you will never get your house burnt down 😉
thoughtful post and thanks for putting it out there. That said, and at the risk of ‘piling on,’ i’m afraid I agreed with the naysayers.
You put it best when you said, “There’s no point in paying for something that I don’t need, right?” But that’s exactly what you are doing. Better to wait till you do need it and then look at term. The need may never arise.
Personally, I’ve never owned life insurance of any kind. I was 31 when I got married and my wife was self supporting. By the time our daughter came along we had enough invested to be ‘self insured.” Partially by avoiding high cost options like whole life.
Since you don’t need the insurance, you have basically bought an investment with some pretty ugly characteristics:
you are locked into it.
you are paying exceptionally high fees.
your projected returns over decades at 7% are very modest. A broad based Stock Index Fund for comparison can be expected to return 10-12% if held over decades.
That 3-5% spread compounded over time is huge.
Still, if your premium is only $600 per year it’s not the end of the world. You’re sure to do better than I did with my gold mining stock back in the day….;)
You’ve made some great points about whole life.
I took on a policy 28 years ago when I was in my 20s – shortly after getting married. Looking back, it’s been a solid decision. As I approach retirement, the Cash Value in a few years will be a nice safety net in case it’s needed. I have a pretty well rounded portfolio with maxed 401k and maxed roth iras. The whole life policies have a well deserved place in that mix.
I’ll share some actual numbers from a recent statement – $519 annual premium – Cash Value after 28 years is $33,166. This is a return of 5.1%, even if you don’t factor in the value of the life insurance over the life of the policy. The % return will continue to improve as the policy matures further.
Although investing in a good diversified mix of stocks/mutual funds is a good fundamental – it doesn’t always guaranty results – As we’ve seen the stock market basically go sideways to negative for the past decade (S&P 500 was 1498 on 1/1/2000 and is 10% lower at 1357 today). With that in mind, there is a place for a good “fixed” income type component to your portfolio. Whole Life has done a good job of that for me.
Oh – one other relevant point, for the past 10 years I’ve been on high blood pressure meds. If I wanted to add some life insurance coverage now it would get expensive.
What a timely post. I was just talking about whole/term insurance yesterday with my business partner, haha
I don’t think this is a bad idea at all. If you are using it for a combination of life insurance and an investment vehicle, why not? Really, I say whatever works for you and is something that you will stick with, go for it!
Hi 20s Finance,
I was wondering what your opinion on car insurance was?
I always try to to get the bare minimum legal cover. This is because I reasoned that even if I got good cover and crashed and needed a payout, the insurance companies would eventually claw back the money through increase premiums over the next few years, so I figured I might just as well pay for the bare minimum.
I’ve always been a big believer in term insurance however our insurance advisor suggested that my husband also try to get whole life if we can get it. My husband was born with a non life threatening, very misunderstood liver disease. He has been unable to get life insurance thus far. We are currently working on some ways to get the ‘disease’ to a state that is acceptable to an insurance company. In the meantime he is trying to lose a bit of weight and make some other changes that should get him a lower premium. As soon as we are there we will try to get a whole life policy so he will be locked in. I had never thought of doing it this way and had never considered a whole life policy before because everyone always says term is the way to go. This plan makes a lot of sense for us.
We have a whole life policy from NWM like you. Unfortunately, I didn’t understand it for awhile (got talked into it by the in-laws), and for the past few years have been rather grumpy about the whole thing. Our premium is $7K a year.
However, sure. If my husband passes away, I will receive a min of $450K and as he gets older, upwards of $1.5mil. When we retire at 65, it will provide us with an annual payout of $30-40K – if we wait until he’s 70, we can get around $1.2mil in cash from it.
The rates are low, the fees were high upfront (which is what scared me, to be honest). But on the plus side at least it forces us to save money every year, in addition to our Roth IRAs. If we didn’t have to, would we invest $7K a year? Probably not. It’s a savings vehicle that I don’t calculate into our net worth, so when I do, it is surprisingly delightful.
I highly suggest people do their own homework before getting this type of thing. Don’t let relatives talk you into it, no matter their good intentions. That was the worst part, for me – feeling like I was bullied into making a decision because my in-laws told us to do this.
7k a year premium???? that’s crazy! I pay 600 for 1 million 30 year term. My wife pays 500 for 1 million 30 year term. I’m not sure how the 7k annual premium is worth it.
Personally, I have gone with term insurance. My father went with whole life. To each his own. Let us know how it turns out.
I was going to go whole life as well until I read all the fees. I don’t plan to use life insurance as an investment vehicle.
My dad passed away over 10 years ago when he was in his 40s. He was healthy (i.e. ideal weight and height), didn’t smoke at all and was only a casual/social drinker.
My mom’s financial advisor suggested whole life insurance to my family few years before my dad passed away just in case something bad would happen to the breadwinner of our family (especially considering I was still in my early teens and they were planning on having a 2nd child).
If it wasn’t for the payout that we got from the policy, my family would be left with nothing (since my dad’s business was apparently having some problems).
Now even though I’m in my 20s, I already got a whole life insurance since the premiums are fairly low and it’ll be there for me even after I finish paying it off.
I agree with TFB. Life insurance is not an investment vehicle. 30 year term would be much cheaper than the whole life policy. I’m sure in 30 years you probably can self-insure. My wife and I both have a 1 million dollar 30 year term policy that cost us 600 and 500 bucks a year. I’m basically using life insurance as a hedge just in case one of use dies. If either of us die within 20 years we will be a financial burden. But if we both live past 20 we will not need life insurance.
I just “refinanced” my term life policies and now have $2.5m of coverage for $1790.00 per year. Keep in mind that I’m now 34 and just took out the policy.
My issue with whole life is that most people that do have whole vs. term, don’t have nearly enough coverage. $100k of whole life is nice, but for most, will be gone in less than 2 years….and then what?
Out of curiosity, I ran some quote for a whole life policy on myself and about passed out. I could never afford the premium that would be enough to make sure my family is OK.
That’s a lot of coverage, Jeff. It makes sense in your situation. If my wife weren’t working, I would probably consider something else to make sure she was covered.
All of you that commented about how permanent insurance is a bad choice are uneducated and ignorant of the financial stability of Northwestern Mutual. I’m going to take a long shot and guess that you’re also probably in the business… which means you’re not with Northwestern Mutual, which could only mean that you’re probably jealous that you’re stuck with some shitty company calling clients from a company book of business and wondering why you can’t sell permanent insurance. Buck up. Get a real job. Real financial planners protect their clients from the risks of the market and help their clients protect the ones they love. Talk to any NM policy owner and ask them if they don’t love what it does for them. I bet you won’t find one that hates paying their premium. Jackass. Have you ever looked at the lapse ratios?? Less than 5% let their policies go. Hmmmmm…….?????????????????? I wonder why?