One Insurance Not Worth the Money: Term Life Insurance

WalletPop lists seven insurance policies that aren't worth the money and to my surprise, they included term life insurance in the mix with divorce insurance, car rental insurance, and others. Their thoughts:

Some insurance agents may disagree, but Canton says term life insurance can be a big waste of money. In his opinion, term life is like renting a home; it's a "wasting asset." Whereas whole life insurance, while more expensive, is like buying a home. With a whole life policy, part of what you pay is a set amount that goes into a "forced savings" account where you earn interest or dividends and can even borrow against at low interest rates. Term life runs until the end of the term and then it is done -- unless you renew the policy at a very high cost.

According to Canton, about 92% of all term insurance policies never pay a benefit because people lapse (give up) the policy before they die. That's one of the reasons why term insurance is cheaper; carriers know they only have to pay out on about 8% of policies, says Canton.

For a small minority of people who are investment savvy and who believe they will not need coverage later in life, buying term and investing the rest of the money they would have spent on a whole life policy might be a good option, Canton says. For the vast majority of people, however, whole life is a better option because they can be assured that they will have a guaranteed nest egg in their golden years.

Let me highlight a few phrases:

• "Some insurance agents may disagree." Probably. But most would likely recommend whole life. Why? More fees.
• "Term life insurance can be a big waste of money." Yes, it can be a waste of money, just like whole life can be a waste of money -- and just like many things CAN be a waste of money. Think they used the qualifier "can" as an out in case people complained?
• "Term life is like renting a home; it's a 'wasting asset.' " Actually, it's an expense, not an asset at all IMO. Consider this: does anyone put it on their net worth statement as an asset? No, I didn't think so.
• "Whole life insurance, while more expensive." How about "way" more expensive?
• "For a small minority of people who are investment savvy and who believe they will not need coverage later in life, buying term and investing the rest of the money they would have spent on a whole life policy might be a good option." Like those of us who have a plan, know how to handle our money, and eventually become self-insured? Count me in.

Overall, my take is they should have stopped with six insurance policies that aren't worth the money. Term life insurance, IMO, is not a waste of money any more than whole life is, and you can certainly argue that it's LESS of a waste.

What are your thoughts on this issue?

Comments

[AA]

There are times when whole life insurance makes sense, say for high net worth individuals who are trying to avoid taxes on an inheritance for their heirs. However, I couldn't agree with you more that term is probably a better option for most people. This debate is actually what got me into personal finance to begin with, as I was once "sold" a whole life insurance policy and didn't realize how stupid it was until about 4 years in...when I couldn't cash out but didn't want to keep paying high premiums. I took my very expensive money lesson and moved to term.

As for a savvy investor...all the savvy investor needs is to take the difference in premiums ($100/month in my case) and drop the difference in a low expense index fund, which takes hardly any "savvy" at all. Insurance salesmen want the average person to think they aren't "savvy" and trust them, which also means paying them commissions and fees.

[Matt]

Inusrance. Bleh.

Buy term and invest the rest of a whole life and you will be better off is what I was told 20 years ago.

Nice little nest egg I have if I were to croak right now.

[Mary Kay]

I couldn't agree with you more. I researched this almost thrty years ago, when someone I know was trying to sell me a variation on Whole Life insurance (maybe Universal). I have heard/read nothing to change my mind since then. I guess all insurance is a waste of money if you never collect on it - homeowners, auto, disablity, umbrealla liability, etc. We have those, but haven't collected. We're like you FMF, working towards self-insurance.

[NoTrustFund]

I'm also with you. It's tough buying insurance, I always feel the insurance agent is walking away with a huge pile of fees. I feel this is especially true for whole life insurance.

For us, term life insurance definitely made the most sense. It's less expensive, and when you are ready to be self-insured you can stop paying.

I wish this article wasn't so hard on term life insurance as I think for most people it is the right way to go.

[KismetPlan]

FMF - I agree with your take on this. I'm generally all for trying to challenge conventional wisdom in personal financial planning (one of my favorites is the book Spend 'til the End), but I really can't agree with the idea that Whole Life is a better option for most people (I'll concede that it MAY be better in some situations).

Comparing Term to a house purchase isn't the right analogy...it's more like homeowners insurance. It's an expense you pay to ensure that a disaster doesn't thrust you or your family into poverty.

If it's a "forced savings plan" that makes the author feel that Whole is a better option, there has to be better options that are far lower cost.

As for lapsing policies that never get paid. That either comes down to a plan of self insurance, or poor planning.

[DIY Investor]

For a small amount of money you can insure that your family will be able to achieve its dreams - get the kids a college education, enable the wife to keep and maintain the house, pay off the car etc. This is a waste?
Whole life is only better if you are clueless on investing and can't save unless someone is forcing you to save. After all the insurance company is doing the saving/investing for you and charging you a big fee.
On the home versus rental check out
http://rwinvesting.blogspot.com/2011/02/rent-or-buy.html
There comes a point in life where you have to do the math. If you can't do the math at least talk to some people who bought houses within the last 4 or 5 years.

[jeffinwesteernwa]

If "buy term and invest the rest" actually WORKED , there would be a LOT more financially indpendent people. But, most folks don't/won't have the DISCIPLINE. In reality: a combination of insurance, temporary needs (mortgage, insure childrens college, pay off debts, etc.,) can be covered by TERM, the needs go away (like the insurance does)! PERMANANT needs like: survivors income, final expense costs, taxes to transfer estate, etc., are permanent needs. Thus Whole Life works. the insurance is forever inn place. Purchased young from a HIGH rated company, many whole life policies will be paid up in middle age, thus generating a lifetime (tax free, not flucutaing wiht the stock market, immediatley availble too) death benefit and an ever increasing cash value for financial flexability without paying premiums! As a 16~ year financial planner and retired at age 47 with paid up whole life insurance, i KNOW!

[Everyday Tips]

I think you are right, they should have stopped with 6.

You are exactly right, term life insurance is not an asset at all, it is insurance. Just like my car and house insurance is not an asset. It is just something you have to spend money on if you are going to be a responsible adult (especially if you have children).

I wonder how many people who read that article will consider dropping their term insurance and switching to whole life?

[Cindy]

Renting is a wasting asset? Who knew? Here I thought I was putting a roof over my children's heads and living a pretty flexible lifestyle (meaning I don't have to sell this heap if we need to move). Some people live with their thoughts so much on squeezing every last dime out of life that they forget to just freakin' live it. And we have term life insurance, too. Whole life was wasting an awful lot of our money. We've got twice the coverage for a lot less money now. If I want to invest, I don't need an insurance agent to help me do it.

[Ed]

It is really kind of sad so much bad informatio. Out there about life insurance. Agents try as hard as they can to make people think there products are to be used as investment tools. Obviously we all seem to agree that they are not.

Insurance is all about hedging your risk and nothing more. I have a 20 year term policy that will pay my family what they need to maintain life without me if I shall pass. After that 20 year period, there will be more than enough "investments" to keep them going without life insurance.

Good friend of mine is in the insurance business an he has made a very sucessful career out of it. He is a very smart but but somewhere in agent training, the insurance industry did a very good job of making sure he is now ignorant to any argument that criticizes the value of a good whole life policy as an investment. I am sorry but the term whole life, good and investmby do not go together. It does have it's place, but I really wish the insurance business would start to market there products honestly....

[Phil Laube]

Term life in my opinion has almost always been a better option - especially for young people. Too many young people talk to insurance agents pushing the whole life and end up with not enough life insurance. When we are young and starting families is when we need more. It's also when term life is the cheapest. Sounds like a great product to me.

I never like a product that is all things to all people. Buy the amount of term life you need for your time in life and use an investment plan to 'force' yourself to pay for retirement or other future needs.

[Mark B.]

This is some very bad advice. I agree with FMF, term insurance is an expense that gives your family security and peace of mind, you can't replace that. With many people living on tight budgets, a cheap term policy is a great way to buy some security with little expense. I have seen families lose a parent with no life insurance, it is devastating. A cheap $100k policy would have made a world of difference for these families and costs about $15 a month.

This article is VERY POOR advice that will only hurt families if they follow it.

[Strick]

"Forced savings" sums it up. People who need their savings "forced" at the expense of return are by definition not making rational financial choices and so whole life may be good idea. Of course, they're probably not reading this article.

[Susan]

We have both actually. We have term policies that were cheap, and will take care of a surviving spouse if anything happens in the next 20 years - it will pay off any debts and take care of school expenses for our child.

We all have small whole life policies that are now self-paying through their dividends, so they cost me nothing each year.

In our family is a genetic illness that makes it impossible to buy a new policy. I had my whole life policy prior to finding out about this condition. I hedged my bets and got a small policy for my child so that if this condition rears its ugly head, there will be protection for my child and my child's future spouse and possible children.

As with most things, it comes down to what works best for you and your family - someone else's mileage may vary.

[Josh]

term life is better than whole (if you are disciplined enough to invest the difference, just like in many situations renting is better than owning (if you are disciplined to enough to invest the difference) from a strictly financial standpoint of course.

[Sarah]

as far as I am concerned it is term all the way. Enough to cover the entire house if something should happen, as well as the rental property we own. Once we get the mortgages paid off, the term amount will be less, and once the kids are off on their own, it will be even less. I just don't need the same level of coverage in 30 years as I do now.

[bb]

It's not a waste of money if you die within the term, LOL. Come on, it's insurance, nobody really wants to claim it. It's a waste of money with that 2% commission with universal.

[Benjamin Bloom, LUTCF, CLTC]

Life insurance is often the foundation upon which many comprehensive financial strategies are built. That’s because, at its core, life insurance helps you fulfill your promises to the people you care about by delivering a financial resource when it’s needed most.

A thorough understanding of your family’s current and future financial needs is key when determining how much and what type of life insurance is appropriate. A sufficient amount of coverage is essential to ensure your family’s financial future is not left to chance. Once you’ve determined the appropriate amount, you next need to decide what type of insurance is right for you.

There are two basic types of life insurance to choose from: permanent and term. In many instances, people find that their objectives are best met with a combination of both. One way to understand the difference between the two types is by using a common analogy: owning a home versus renting an apartment.

Protecting your family with the right amount and type of life insurance can be one of the most important financial decisions you’ll make. Term life insurance can be an affordable option to get the coverage you want at a cost you can handle.

If it’s lifelong coverage that you desire, permanent life insurance offers an array of benefits that apply to a range of life stages, ensuring that whenever you or your family needs financial protection, your coverage is there

[Tim]

I buy "insurance" to cover the cost of events I cannot afford. Period. That is what insurance is. I have term to cover the lost income my family would suffer if I died. It is an expense. I never bought the "invest the rest" story. My investments are completely separate from insurance in my mind. I am sure I invest more that the difference on a regular basis. I just don't think of it that way. FMF is right!

[jim]

"about 92% of all term insurance policies never pay a benefit"

Whats the % for whole life?

About 25-33% of whole life policies lapse within the first 3-5 years. When a whole life policy lapses early you can take a giant loss on your money due to surrender fees. People lapse term and whole for many of the same reasons but whole life has a larger investment you can lose due to the larger fees.

There is no free lunch from the insurance companies. Whole life is even more profitable for them, hence the fat commissions their salesmen get for pushing it. Profitable for them means unprofitable for you.

[taxpro, philadelphia]

my first question is, what did a whole life agent (or company) pay him to offer that advice?

the second question is, when you die, does your beneficiary get both the policy amount AND the cash value? i think not.

third, ask the insurance agent what his commission is on a term policy vs a whole life policy. if he/she says that isn't important, run-do not walk, away from that office as fast as you can.

lastly, ask the insurance agent what kind of policy he/she has for his own family. if the reply is something like 'well my situation isn't the same as yours', run as fast as you can from that agent. what? they don't have a house or car to pay off if the primary wage earner passes away? no kids to put through college? no need to provide for a spouse to enable him or her to maintain the same standard of living for the surviving family?

[Bruce]

When I read the WalletPop article it made me question any of their advice if they say not to buy term life but buy whole life. They had it completely backwards, and you covered the points why quite well.

[Georgia]

I have term through my retirement system and it will be enough to bury me so my son & daughter don't have that expense.

I also advised many of my clients at the local S&L I managed to buy term insurance instead of PMI when they had a loan. We would except term with an add-on making us the beneficiary for only what they owed us when they died. As I explained, PMI pays only what you owe us and nothing more. A term policy would pay us what your owed and you would get the rest. And term was much cheaper than PMI.

I actually had a customer's family benefit from this. They had a 35k home loan and went to an agent and got a $100k term policy very cheaply. A year or two later he fell asleep at the wheel and died. His family now had a paid off home and about $60+ k in the bank. Since there were several small children this was a big boost for their family.

[MBTN]

Repeat after me... life insurance is INSURANCE! Insurance is to protect you from a risk which isn't likely but, if it comes to pass, will have a big financial impact. You don't buy insurance to make money. You buy it to protect yourself from a big loss.

Nobody looks to turn health insurance, auto insurance, homeowners insurance into a investment. I've probably paid thousands and thousands of dollars towards my auto insurance premiums over the years without a single claim. I've definitely lost money on. You know what? I still carry it (and I still would even if it wasn't mandatory). Why? Because if I ever do get into an accident, I would rather have the insurance company pay a six figure liability claim because such a claim would wipe me out.

Same with life insurance...

I have life insurance (term life by the way), not because I want it to pay off. I would love to be in that 8% category where my policy lapses before I need it. That would mean that I was able to live to a ripe old age. The reason why I have it is because if I did meet an untimely demise, I want to make sure that my family can be supported without me. Small risk but big financial impact if I die.

[Harm]

Walletpop is such blather that I would almost consider
doing the opposite of what they suggest. They are like Yahoo
finance, recycled, regurgitated advice copied by people who have
NO concept of what the articles say.....

[FMF]

Harm --

You need to stop holding back your opinions. Tell us what you really think! :-)

[rxjpk]

There are very few certainties that you can insure. Life is one of them. We are all going to die. Term policies are true "insurance". Whole life policies are a guarantee to pay WHEN you die, not IF you die during the term of the policy. There are benefits to both, and i think it is helpful to look at both options when doing your personal financial planning.

[Chris Parsons @ Small Business Dreams]

I 100% disagree that Term Life Insurance is not worth the money. Whole Life Insurance is terrible and WalletPop should be ashamed of publishing that article.

I did a whole post on why Whole Life Insurance is a Terrible Investment

[Fadzil]

As a small besinuss owner, we have LTC insurance in case something happens to either one of us. It wasn't an easy decision to make but we are confident that we made the right decision.