There’s No One with Endurance Like the Man Who Sells Insurance
In the ChooseFI facebook group, https://www.facebook.com/group/ChooseFI/ , the discussion about life insurance comes up from time to time. Some important items to consider:
- Why get life insurance
- How much insurance do I need
- How long do I need it for
- Whole Life vs Term
Groundhog Day Insurance Salesman
Why get life insurance?
Like any other product, get it when you need it. In the case of life insurance, get it when someone else is dependent on your income. This could be a spouse or partner, and of course, minor children. These are the beneficiaries of your policy. Should you die, the beneficiaries will get the insured amount. If you are single and no one depends on you, you do not need this product.
How much insurance do I need?
You need enough insurance to allow your beneficiaries to replace your take home income, taking into account taxes.
How long do I need it for?
Once your kids have graduated college and your debts are paid off, assuming you have accumulated taxable and pre-tax savings in sufficient amount for your surviving spouse/partner to live off of, you no longer need life insurance. Figuring this out determines the Term of your policy.
Whole Life vs Term
Whole Life is sold as an investment vehicle wherein a portion of your premium pays for the insurance, a portion is commission to the sales team and a portion is invested in some investment of the insurance company’s preference.
The value of the investment is called ‘cash value.’ Each year the cash value builds. At some point the cash value may grow to and exceed the face value of the policy. The annual increase in cash value at some point may be more than the premium and can be used to pay the premium.
You can take the cash value out at any time, as it is your money, but you must either surrender the policy or reduce your death benefit, depending on the details.
Term Life is pure insurance. Is there any other insurance product you purchase (home, car, medical) that comes with an investment? Why should life insurance be any different?
Term Life policies are dramatically cheaper than Whole Life policies because there is no investment sold as part of the package. The field is highly competitive so commissions are low.
Term Life contracts are typically either level or declining for a certain number of years. So a 20 year level term policy gives you the same death benefit for 20 years, whereas a 20 year declining benefit policy reduces the benefit as you get older. Level term is the more common product sold these days.
As I see it: a Whole Life policy is really an expensive declining Term Life policy in disguise. Why? Because the insurance company is only at risk for the Face Value – Cash Value of the policy.
Once the Cash Value equals the Face Value, the insurance company is at risk for nothing and you have a not so great investment getting not so great returns.
Since you can do better as a smart person pursuing FI, why would you give the insurance company this large sum of money?
Buy term and invest the difference – that was the slogan of A.L. Williams, an insurance company started in 1977. While that company (now called Primerica) has had its own issues (it uses MLM techniques to build its sales force), the general concept has caught on with the public and all life insurance companies now offer term plans.
So get as much insurance as you need to protect your loved ones, keep it as long as the need exists (until you are financially independent perhaps) and then discontinue paying for it.
Note that for individuals with very, very large estates, especially illiquid estates like a large family business, a whole life policy can be part of a strategy to keep the business intact after a death of one of the owners. This probably does not apply to anyone reading this article.