There are several different types of life insurance but the basic decision is between Term and Whole life. In doing some research into whether term or whole life was the better option for me, I realized that Whole Life Insurance is not a good option for most people, but then I came across the following Walletpop article: Seven Insurance Policies not worth the money:
Term life insurance can be a big waste of money… 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.
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…
I questioned what type of person would give such advice. Low and behold, Alan Canton, the guy they quote for the article, is – you guessed it, a life insurance salesman. I am disappointed in Walletpop for not doing more due diligence on this article. If you are wondering why Canton would suggest whole life over term life insurance, it’s not because it is what is best for you – it is because of the commissions for himself. Sales agents get an 80+% commission upfront for a whole life insurance policy, in addition to 4% or more each year thereafter. Why so high? Quite simply, because whole life insurance is a rip-off.
Life Insurance is INSURANCE against MORTALITY. The only reason for someone to have life insurance is if others depend on their income, and thus their death would impact their financial situation. Children and non-working spouses do not need life insurance. People without dependents definitely do not need life insurance. Term Life Insurance is substantially cheaper than Whole Life Insurance, and works just as well for insuring your death. The “benefit” to Whole Life Insurance is that it develops a cash value, but you pay dearly for this.
Life insurance is NOT an investment. And yet, Whole Life Insurance is depicted as being a safe, reasonable investment. It is anything but. The annual percentage returns are pathetic – as little as half of what you could make in the stock market. But that isn’t the worst part. Not only do the percentage returns suck, but then on top of that the fees are outrageously high. And these fees come right out of the returns you are not getting from this “investment”.
For the amount of money you spend to keep a Whole Life Insurance policy, you could invest in low-fee index funds and end up with double or triple as much money in retirement. And that’s if you start in your late 20′s or early 30′s… Don’t even get me started on paying into this since birth like many parents have been mislead into doing for their children.
If you need life insurance, get Term Life Insurance, and only as much as you need (enough to help support your family until they could adjust their financial situation – it doesn’t have to be enough to set them up for life).
As far as I’m concerned, Whole Life Insurance Salesmen are conmen, and the only reason that they can sleep at night (if, indeed, they can) is because of cognitive dissonance.
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