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Ask Money

A whole life policy

Chris Farrell Oct 8, 2009

Question: My wife and I are in our early 50s. We have been told that we should have a whole life policy in our investment portfolio as a conservative investment vehicle (we currently carry $150,000 term life policies on each of us). Our combined gross annual income is approx. $155,000, and we are saving for retirement in 401Ks at approx. 15% of our annual income. We also invest in Roth IRAs and have two homes that are nearly paid off. So, about the whole life for us, what do you think? Thanks very much! – Tim, Indianapolis, IN

Answer: I’m skeptical. Do you need more life insurance than you are currently carrying? If yes, why not simply hike the amount of term life insurance you have currently. Or do you face a future that calls for a whole life policy?

A whole life policy combines a death benefit with a tax-sheltered savings account. In essence, you pay a premium for the coverage, the insurance company deducts insurance and expense charges, and then it credits the rest of money into a tax-sheltered interest-bearing checking account. It can quickly gets a lot more complicated than that, by the way, but that’s still the essential idea.

I like judging whole life from the perspective of does it meet your life insurance needs better than term insurance?

To be clear, whole life fills a need. But I’m skeptical that its a conservative investment alternative for many people. If you need a stronger hedge against bad times in your overall portfolio why not put the money into all kinds of conservative savings choices, from CDs to Treasury notes to I-bonds. The cost of owning investments like these are minimal. (And if you buy I-bonds, bills, notes and bonds directly from the Treasury there are no commission costs to buy.) You don’t have to worry about default risk. Interest rates won’t always be at such razor thin levels, either. You can be tax smart with these alternatives, too.

Clearly, you’re good savers with plenty of assets and almost no debt. I think I would just continue what you’re doing.

If you do go the whole life route, take your time, shop around, and ask lots of questions.

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