Is it better to have term life insurance or whole life insurance?

Question

I am 26 years old and just had a baby and want to know which insurance is better whole or term.

How do I determine how much to get?

Who besides my daughter if anyone should be the beneficiary? Note: Her father and I aren't married but I was considering leaving him a percentage so that he could have extra $ to provide for or daughter if neccessary - Is this a good idea?

Answer 1

Cash value life insurance vs Term insurance



What is life insurance? Life insurance is an insurance contract that pays your beneficiary (which are usually family members) a sum of money upon your death. Main reason why people purchase life insurance is to protect the family from financial loss, otherwise known as "income protection." There are currently two types of life insurance out there available to the public. One is known as "cash value" life insurance and the other is known as "term insurance." If you have life insurance right now, it is important that you read your policy. The information given in this blog comes from my life insurance text books and from experience of reading many of my client's life insurance policies.

What is cash value life insurance? It is a term policy to age 100 that contains a savings vehicle in it. Cash value comes in many forms, such as whole life, universal life, variable life, or a mixture of those words together such as variable universal life or universal whole life, etc. The advantages of having cash value life insurance is that you are protected until age 100, you can use the cash value anytime for any use such as paying your premiums, and interest on your cash value is tax-deferred.

The disadvantages of having cash value life insurance is that you are paying lots of premiums for low amount of coverage, no cash value is accumulated during first two years of the policy, rate of return is very low, and if you use any of the cash value, you will owe monthly interest on it. This interest does not go back into the cash value, but rather kept by the insurance company because the money you taken out of the cash value is treated as a loan. In many policies, if you were to die, your beneficiary will receive the face amount and all cash value will be kept by the insurance company. Keep in mind, if you use any of the cash value and you did not pay it back, this amount will be deducted from face amount upon your death.

Another disadvantage of cash value life insurance is that they are riddle with insurance fees. The most noticeable fee is the surrender charge. This is clearly stated in the policy of how much cash value you will get if you surrender the policy. Then there are fees you don't see such as administrative fees, policy fees, maintenance fees, and all these other operating fees. If your cash value life insurance is a variable policy, that means your cash value is invested in the stock market. Investments too have their own operating fees. If you combine investments and life insurance together, now you have so many different fees that eats away the returns on your investments.

You are probably asking, why would anyone buy this kind of life insurance? First reason is that many people do not understand how this policy works. Second reason is that people don't buy life insurance, they are sold on it. The agent who sells cash value life insurance does not care about you or your family. All he/she cares about is how much commissions he/she is getting paid and they going to use whatever deceptive sales tactic to make you buy it.

So, what is term insurance? It is the type of insurance that provides a level death benefit for life. Just like car insurance, if you don't pay your premiums, you will lose coverage. Advantages of having term insurance are: premiums are very low during the term, you have more flexibility to invest your money in a savings vehicle (hence the phrase, "buy term and invest the difference"), and if you were to die during the term, your beneficiary will get the face amount and all your investments. Another advantage is that you can change the amount of coverage without affecting your savings and vice versa. (In cash value life policies, you are stuck with paying into both.)

The disadvantage of term that while premium remain fix for certain amount of period (10, 15, 20, 25, 30, or 35 years), the premium will go up when it is time to renew. Majority of term policies provide renewable term coverage up to age 100. But there are some term policies that stop coverage after the level term expires because the insurance company wants you to convert it to whole life or universal life.

Why would people buy term insurance? First, premiums are very low and remain fix during the term. In the early stages of your adult life, you probably have lots of debt to pay off such as your mortgage, you probably have kids to support, and you probably don't have much money saved for retirement. So you need lots of insurance coverage to protect the family. As you get older, your kids are all grown up, your mortgage is or almost paid off, and you better have lots of money saved for retirement. As you get older, you probably won't need life insurance or need as much coverage as you did 20 to 30 years ago.

What happens when the level term expires? When the level term expires, you enter the phase of the contract called "Annual Renewable Term." That means you have the right to renew the term without having to provide proof of insurability. The premiums will go up every year or so (check the policy on how often the premiums goes up after the level term). Depending on your policy, you are usually given several options when the level term expires.

(1) You may convert it to a permanent whole life policy (which I don't recommend).

(2) You may exchange it to another level term (I recommend that you significantly lower your coverage amount to a minimum of $20,000). You may need to provide proof of insurability.

(3) You may refuse to pay the premiums to cancel the policy (if you do this, I highly recommend that you allocate the money toward your retirement).

(4) You can change the death benefit to the amount you really need. In most cases, the amount of coverage you need is usually lower than what you needed years ago. In fact, you probably won't need life insurance as long as you enough money saved.

If you have cash value life insurance right now and are probably pissed off about having it, you should figure out what you want to do. Do you want to cancel it or should you replace it with term? It all depends on your current needs. If you have a problem with or questions about your life insurance policy, don't call the agent to get your answers because an agent's job is to sell life insurance, so they won't say the bad things about your life policy. Call the company's phone number that is listed in your life policy (which is usually on the cover page).

If you are going to replace it with term, don't cancel your current life policy yet. First, you want to see if you qualify for term insurance, which you probably will if your health is not that bad. When you get your term policy, then you want to cancel your old life policy. There's a couple things you can do with your cash value. First thing you can do is that you can surrender it. You may have to pay surrender charges on it and you will owe income taxes on it, but at least you have choices on where you want to put this money. The second thing you can do (and is probably the best way to do it) is do a 1035 exchange, which moves the cash value into an annuity product or another cash value life insurance without any tax implications.

I have always sold term insurance and help clients invest their money 100% of the time. That way they are protecting the family's income for a low cost and at the same, building wealth for the future. It does not make any sense to bundle life insurance and savings together. Life insurance's main purpose is to protect your family's income in the event of your death, not as a way to build tax-deferred savings. Since term insurance is so inexpensive, I show clients on how to effectively build wealth. One way is to open an IRA, either Traditional or Roth. Money in an IRA grows tax-deferred. If they max out their contributions to an IRA, then they should put more money toward their 401(k) or 403(b) or whatever retirement plan they have at work. If they don't have an employer's retirement plan, then a variable annuity would be the next choice, not a cash value life policy.

If you are going to meet with your agent to go over your life policy, you want to record everything he says. That way you can review it with your attorney or send it to your state's insurance department to find out if he is telling the truth. If he is lying, you can take lots of legal action against him and his company.

Other facts:

What is a dividend in an insurance policy? It means that you are over paying your premiums and the life insurance is returning (or refunding) it as a dividend. Keep in mind, this is not the same as receiving dividends on mutual funds. Dividends in mutual funds are only paid out if profits are recognized that year, so shareholders will get a share of that dividend.

Getting separate insurance policies will cost you lots of money in the long run. Each policy cost about $100 to maintain each year. If you have multiple policies on yourself, you should immediately change your life insurance agent and probably the company as well. There is no reason why you should have more than one policy on yourself. It is best to add "riders" to the policy such as spouse rider and child rider. That way the whole family is protected under one policy.

All life

Answer 2

It depends....

Term is cheaper, you can get a whole lot of insurance for a small amount (especially at your age if you are healthy).

Whole life can eventually be paid up and cannot be cancelled.  Term life will go up as you get older an may be cancelled at a predetermined age.

If you are looking to simply looking to take care of your daughter until she can take care of her self, go with term....it will save you tons of money over whole life.

Answer 3

Why not both?

Since you are young and single, I presume that money is tight.  Make sure you have enough insurance coverage so that your child has enough money to live on until at least 18.  If you want to send your child to college, that will require more insurance.

In any case you will need to meet with a lawyer to draw up documents that establish a trust (and name a trustee) so that IF you die, the insurance money goes into a trust (usually at a bank) and the person in charge of raising your child (the father or whoever YOU choose) has to spend the money on YOUR child and not on a new sports car and a nice vacation with the new boyfriend/girlfriend.  A Trustee will oversee how the money is managed and spent.

If you don't do this ahead of time, a court (judge) will appoint someone (most likely the father) without any input from you.  That person could be a drug user/alcoholic and the court may still appoint that person to be in charge of your child and your money.

Meet with several PROFESSIONALS - like the lawyer and the insurance agent and perhaps a financial planner to help you in this process.

Also ask about disability insurance.  What if you get sick and can't work but don't die?  Life insurance is no good in that case.

Good Luck

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Answer 4

Focus on the amount over the type of life insurance.  With the same death benefit, all types are worth the same amount if they are in force when you die.  

Next look at the type.  Your budget will tend to dictate which one (or combination) you gravitate to.  Remember that term is best for temporary needs, and permanent is best for needs that last the rest of your life.  Having a life plan will help (you're a top contributor in credit, so I'm sure you're familiar with this concept).  If you buy term that is "convertible" and "guaranteed renewable", you will have flexibility if your plan changes, even if you become uninsurable (ie. stroke, cancer, heart attack...).

Lastly, set up a trust for the kids for maximum legal protection.  The Uniform Prudent Investor Act helps make sure the money is only used for your kid.  The next best thing is to hand your baby daddy a wad of cash and hope he doesn't blow it.  

I always recommend you talk with at least three attorneys and insurance brokers to find your best fit.  Good luck.

Answer 5

It depends on so many factors. My first recommendation is to learn from top to bottom the differences between term and whole. Then, decide what the needs of you and your family are and it should be a pretty easy decision.

Answer 6

Alot of co. will tell u to buy term, and invest the rest. But depending on your life, bills, income......you should talk to a REPUTABLE INS CO agent, discuss your options and there are many. and when I say many I mean many. Also you might want to talk to a financial planner and he might help you foresee better your financial needs in the event of your death, that will help when you speak w/ an agent, you will be able to be very clear on what you need.

Answer 7

We went with term only because whole is not at all affordable for our budget.  Whole is better if you lock in a rate, but about 10times the price of term.

I wouldn't bother leaving the father a percentage. In the event of your death, your daughter would be eligible for social security benefits.  Set up a trust for your daughter that she would be able to collect on when she turns 18.

Answer 8

Never buy a whole life policy. Here is a good article explaining why:

http://lifeinsurancenow.com/how-to-buy-l...

Term will be your best value. You can get the best quote here:

https://www.expert-quotes.net/term_life_...

Answer 9

TERM!!! Whole life or cash value policies are rip-offs. Term insurance covers what life insurance is meant to at a much lower cost. Whole life, cash value, and return of premium are touted as a combination of insurance and investment, but as an investment, the returns are HORRIBLE! Get term insurance and invest the difference in mutual funds.

See the examples at the link below for actual numbers.