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Figuring out whole life insurance

Chris Farrell Sep 16, 2010

Question: I live with my girlfriend of 4 years. We plan on getting married and rent. Combined we have$18,000 in savings and no credit card debt… She also has a couple term life insurance policies. I have none. I understand term but I don’t fully get the whole life product. Family friend is trying to sell me some. I know the premium is higher and I can get tax free money later that is deducted from the value of the policy. I understand the money is tax free because the company treats it as a loan. I assume this would be like a standard loan with fees and/or interest attached. When I bring this to the salesman, he says not to worry because I don’t “intend” to pay anything back. To me that doesn’t mean myself or my estate would not be penalized. How exactly does this work? All my internet research ends up with ads for Metlife or NYlife. Josh, Chicago, IL

Answer: My advice is simple: Don’t buy the whole life policy. A good rule of thumb is to never purchase any financial product you don’t understand yourself. Don’t buy a whole life policy until you and your partner are sure it’s the right product for your financial needs.

Now, for some details: The main reason to own life insurance is to financially protect a loved one from your untimely death. I like term life insurance for most people because term is a pure death benefit. Premiums are cheap if you’re in good health, although the cost of the policy increases as you get older. It’s a simple, plain vanilla product. (Thank you Elizabeth Warren for the descriptive phase.)

Permanent or “cash value” insurance comes with a tax-sheltered savings component, as well as life insurance. The investment returns are difficult to analyze. Types of policies include whole life, universal life, variable life and variable-universal. You can borrow against these policies., but the terms and rules of borrowing vary. But like any other oan you pay back the money. (If you don’t it reduces the value of the death benefit, which can defeat the purpose of owning the policy.) These policies are more expensive, with steeper fees and commission costs.

Don’t get me wrong, cash value insurance makes sense for some people, especially anyone with sophisticated estate-planning needs. The book is dated, but to help you learn more about whole life I would look at Smarter Insurance Solutions by Janet Bamford (Bloomberg Press). It’s dated, but it still has one of the better discussions of term insurance and cash value insurance (including whole life). I also like the writing of Glenn Daily at He’s a fee only insurance consultant. His writing are dense, but he knows what he’s talking about.

By the way, you mentioned that your partner has several term policies. How much life insurance will you really need when you get married? Here’s one way to think through the question. You should each have enough life insurance so that if one of you dies the other doesn’t have to worry about money for a period of time. The survivor can take a year or more–you decide–to deal with their grief, without worrying about earning an income, paying down debts or draining the savings account. If you do end up having children you can always add more insurance coverage at that time.

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