In this post I want to talk about life insurance.
Specifically the difference between Term vs. Permanent Life Insurance, also known as whole or universal life insurance.
It’s a pretty heated debate given there’s a lot of money involved.
Money that people pay out in premium and money that insurance companies make on these policies.
And I get personally heated with this topic given that I’ve seen too many elderly, including my own parents, being pressed to purchase life insurance products that they don’t need.
If you are ready, let’s get right to it.
Why Do You Need Life Insurance?
But first, let’s talk about if life insurance is even right for you.
As the Sandwich Generation, sandwiched between our aging parents and our children, we have a lot of responsibilities.
- On top of emotional support, there are financial obligations that we are responsible for.
- It could be the home mortgage that pays for the roof over our kids.
- Or maybe the extra financial support you provide to your parents to help them make ends meet.
Whatever the case, you have a lot of people depending on you and finances play a big part in that.
So, what would happen to your family and loved ones if something suddenly were to happen to you? Would your spouse be ok? Your kids? And how about your aging parents?
Right now if you are healthy, it’s easy to not think about these kinds of questions.
However, if something did indeed happen, not being prepared for it will be one of the biggest financial mistakes you can make.
For my wife and I, since we have young children and aging parents who depend on our income, we made it a priority to have life insurance.
So, yes. For the Sandwich Generation like us, I believe life insurance is a must.
Where to Start
But the next question you might be asking is, what kind? Where do I start?
Should you blindly start calling or emailing life insurance companies online? Before you do that, you want to have a very specific criteria for what you are looking for. Why? Because life insurance is almost always sold on a commission basis.
Have you ever heard of the saying – Life insurance is sold, not bought?
The types of insurance that pay salespeople the highest commissions are oftentimes the ones you least need.
So, before you start exposing yourself to the world that you are open to buying life insurance, you want to clarify exactly what you are looking for, so you aren’t steered by the insurance salespeople towards a direction that is best for them, and not for you.
Term Life Insurance
There are primarily two types of life insurance. Term and Permanent – also known as Whole or Variable Life insurance.
I’ll say it clearly before we even go into comparing these two.
For the 99% of you out there, the best type of life insurance to effectively protect your loved ones is Term Life Insurance.
Let me say that again, for the vast majority of you, stick to Term Life Insurance regardless of what the insurance company is trying to sell you.
I’ll go over later in the post. There is a very rare case in which the Permanent Life insurance could make sense. But if you take one piece of information from this post is that Term Life Insurance is most likely the best option for the Sandwich Generation.
So real quick. Why and what is term life insurance?
Term life insurance is an insurance that is issued for a specified number of years, the term.
For example, if you get a thirty year policy, you would pay a monthly premium for thirty years and the payout, the death benefit, is guaranteed to your beneficiaries if you die anytime during that thirty year window.
If you are still alive at the end of the thirty year period, the policy just expires.
You no longer pay the premium and you are no longer covered by the life insurance.
It’s quite simple. Probably one of the simplest financial products you can purchase – which also makes it one of the best ones to purchase because everyone understands exactly what you are buying.
Don’t Get Hung Up On The Expiration Date
Some people get hung up on the idea of the term life insurance expiring. I remember having a conversation with my mom about term life insurance and she was annoyed by the fact that after all she would pay in premium, there would be nothing left at the end.
What’s interesting is that we don’t think the same way about car insurance or home insurance. Many of us pay our premiums regularly and don’t get mad when the house doesn’t burn down and we don’t get to use our insurance.
Life insurance is the same. Insurances are tools to manage risk.
The risk of something happening to us in the next 20 to 30 years, and term life insurance gives us the peace of mind that our families will still be taken care of.
How Much To Get?
As regards to the amount, a simple rule of thumb is a minimum of 10 times your income.
If you have other obligations like debt and kids’ future college tuition, you can include them into your calculation and aim for 15 times your income.
Make Sure To Shop Around
And just because now you are clear that you will purchase a term life insurance, don’t be careless about where you get them from.
Start out by asking your current insurance company. Where you have your car and/or home insurance.
But ask around so you get a good comparison of the quotes.
For us, after having looked around, we did feel comfortable with going with our existing insurance company, USAA. They were able to provide my wife and I simple term life insurances at the market rate.
It also made it simpler to have all our insurance products under one company.
Permanent Life Insurance – Whole Life or Universal Life Insurance
Alright, now that we’ve talked about term life insurance, let’s get into one of the most widely sold insurance products on the market – the Permanent Life Insurance, also known as whole or universal life insurance.
I won’t get into the differences between the types of permanent life insurance here. There are nuanced differences, but the basic concept is pretty much the same.
And since Whole Life Insurance is the most common type of permanent insurance policy, I’ll refer to Whole Life for the rest of this post for simplicity’s sake.
Permanent insurance or whole life insurance, as its name suggests, is a policy that never expires.
You pay a monthly premium until your death, at which time, your beneficiaries will receive the full amount promised in the policy.
In addition to the full policy amount at death, a portion of the premium you pay into it also accumulates a cash value.
So your beneficiaries not only get a life insurance benefit at your death, but you can also access the cash you put into it too while you are still alive.
Stepping back, this policy structure feels quite appealing. It almost feels like you get to have the cake and eat it too.
You get to access the money you deposit, while you are still alive. And it never expires, as long as you are continuously making the premium payments. Sounds like a pretty good deal compared to a simple term life insurance, right?
However, there’s another saying that should be running through your mind.
If something seems too good to be true, it probably is.
Insurance Broker Commission
First, the insurance broker who oftentimes is trying to sell you whole life insurance, gets quite a bit of commission by selling you this product. Much more than compared to a term life insurance. And ofcourse the reason is that whole life insurance pays out so much more. It makes more money for the insurance company.
And this already makes me suspicious. Highly marketed products are highly profitable. And if it’s so highly profitable, where is the money coming from? Am I getting a good deal here? Or am I the sucker?
Insurance Shouldn’t Be Investments
Insurance shouldn’t be used as an investment vehicle. Remember, insurances are risk management tools – to protect us from catastrophic events. Not wealth building tools. They are wealth protection tools.
Insurance companies are in the business of insurance, not investments.
The best way to grow your money with investments is with actual investment products like low cost index funds, not with the insurance companies.
I do give kudos to these insurance company’s marketing departments though. They have done a marvelous job of marketing the idea that you can make money through your life insurance.
It’s so ingrained in so many people’s minds that I feel like it’s a conversation I have with my parents almost every single year.
This Gets Me Real Boiling
And this is where it really gets me boiling.
I feel too many elderly that I know around me are constantly being sold these Whole Life Insurance when it doesn’t make sense for their situation. Yes, there are very rare cases where Permanent Life Insurance can play a role in a person’s tax minimizing strategy – however those cases are few and far between.
Most often, these whole life insurances are being sold to people who can barely afford them. Not to people who have so much wealth, they need to deploy tax management strategies.
Let’s review a few common marketing tactics that many sales people use:
Whole Life Insurance Sales Pitches
Sales Pitch #1 – “It’s also building your wealth because it has a cash value.”
There are so many better ways to build your wealth.
The premium on a whole life insurance is multiple times more expensive than a term life insurance.
An average quote for a one million dollar 20 year term policy for a healthy 40 year old male is approximately $71/month. For the exact same male, a million dollar whole life policy starts at around $1,300/month. That’s a difference of more than $1,200 dollars that you can invest in the market and really grow your net worth.
According to Consumer Reports, the average annual rate of return on a whole life policy is 1.5%. This is barely more than a high-yield savings account. Compare that to the stock market which has yielded a return of approximately 8% the past 30 years. There is no comparison.
The extra money you pay to a whole life insurance policy could be invested to yield you a much greater return than the policy can.
Sales Pitch #2 – “You can pass on this benefit to your children. Even if you don’t have any other assets, they will have this life insurance policy from you.”
I just don’t like how guilt is used in these kinds of sales tactics.
And as I mentioned earlier, the monthly premium cost just doesn’t make sense for most people to get this kind of benefit.
If you really want to leave something to your children, it makes much more sense to take the difference between what you would pay for a whole life vs term and invest that money to grow. And the great thing about this is, the longer you live, the longer it has time to grow, and more you can leave to your children.
Time is the real secret sauce to making money grow.
Sales Pitch #3 – “Whole life insurance acts as a tax deferral because once you put your money in, you can essentially take out a tax-free loan for the amount.”
The sales person isn’t lying. This is technically true. However, that doesn’t mean this is the best way for you to get a tax deferral. There are many many more tax advantages you can and should use before this option even makes sense. Tax advantaged accounts like 401(k) or an IRA should be prioritized first.
A Whole life insurance is not the only tax planning strategy, nor is it the best. And it probably is one of the most expensive ones out there so be cautious.
If you are one of the 1% of the population and in a position where you’ve maxed out every single pretax, tax-deferred bucket available to you and are in a strong financial position to even consider this low-yield option, congratulations. You are truly wealthy and I’m flattered that you are even watching my video.
In such a case, I would highly recommend working with a specialized tax planning expert to best maximize your tax options.
For the rest of us mortals, like myself, my recommendation would be to get a
- Simple 20 to 30 year
- Term life insurance
- 10 to 15x your income
This really is the best, and I would almost say, a must for the Sandwich Generation.
You will get the peace of mind that your family and your loved ones will be protected.