Should You Buy Term or Whole Life Insurance?

The Primary Question

I advise my clients to answer this question first: "Is the reason I'm considering buying life insurance permanent in nature or temporary in nature?" Said another way, "Would I like the benefits of life insurance to be paid to my loved ones no matter when I die or is there a certain point in time where they would not want or need the proceeds of life insurance?" Some things like a mortgage could be both. The term of the loan, by definition, is temporary…that loan will be paid at some point in time. However, most clients do not own one mortgage for the life of the loan. Typically, they refinance and extend the expected debt beyond 30 years. While paying off a mortgage after 30 or 40 years is temporary, as it relates to life insurance, I consider issues (i.e. debt or need for life insurance) that are expected to last longer than 25 years permanent needs for life insurance.

The 2 Greatest Fallacies

  1. I won't need life insurance after I retire because my retirement accounts and savings will be sufficient to support my loved ones if I die
    This is the biggest and most frequent mistake I see clients make time after time. While, in theory, this thought makes sense, in reality, retirement savings isn't what it was projected to be, and other needs arise. I consistently hear from retired clients about why they want to continue life insurance beyond age 65. Children are still financially dependent, their 401(k) took a beating in the market, they were out of work for a time which depleted savings, etc. Often, life doesn't go according to plan. Permanent whole life insurance helps protect the surviving family if savings and retirement accounts aren't what they're supposed to be.

  2. I won't need life insurance for my kids after they graduate college
    Once the kids graduate college, they'll be off on their own, right? More often the answer is WRONG. Many kids don't graduate in 4 years. Most live at home with their parents for a while. I have a neighbor whose son, a good kid, is now in his late 20s still living at home struggling to get his career started. Often, kids still rely on their parents for financial security long after they graduate college. Term life insurance can expire prior to kids 'leaving the nest'. Whole life insurance protects the family.

Needs that Term Life Insurance can solve

  • Insure a loan that lasts 20 years or less
  • Insure a Buy-Sell agreement where partners of a small business will sell the business or retire in 20 years or less
  • Provide survivor income when the surviving spouse expects to remarry within 20 years of the death of the primary wage earner.

Needs that Whole Life Insurance can solve

  • Provide income to the family
  • Insure long term loans
  • Provide supplemental retirement income
  • Informally fund Non Qualified Deferred Compensation
  • Creative strategies to attract and retain key employees