If you’re wondering, “Do I need life insurance?” you’re not alone. Life insurance can be a polarizing topic, especially when deciding between term life insurance vs. whole life.
If you don’t have life insurance, chances are you’ve heard from random advisors who “got your name from a friend” about its merits. And while many of them are right about life insurance generally being a good idea, we think that “whole” life insurance is rarely the best choice for anyone’s financial situation.
Let’s dive into the differences between term life insurance vs. whole life policies, address common questions such as “Do I need whole life insurance?” and provide guidance on assessing your insurance needs. We’ll also review good alternative investments to life insurance and the importance of seeking unbiased advice.
Term Life Insurance vs. Whole Life Insurance
Term life insurance does just what it sounds like — covers you for a specified period, or “term,” typically 20 or 30 years, ensuring financial protection during crucial life stages. It’s a cost-effective option with lower premiums compared to whole-life policies. At the end of 20 to 30 years, most people’s kids are out of the house, their mortgage is paid off, and their assets are acquired. In other words, term life insurance is particularly suitable for those with specific financial obligations that diminish over time.
On the other hand, whole life insurance is designed to cover you regardless of when you pass away. It’s worth noting the counterintuitive nature of this policy, considering its high premiums and the fact that it may not be necessary for individuals without dependents or mortgages. The cash value component of whole life insurance, similar to a bank account, adds an investment element. However, it tends to yield lower returns than other investment options. This is primarily because the investments made by whole life insurance policies are generally in very conservative, low-risk financial instruments, like bonds.
While these conservative investments are less volatile and offer a degree of safety, they typically have lower growth potential compared to higher-risk investments like stocks or mutual funds. Additionally, the fees and expenses associated with managing these policies can further reduce the overall return on investment. Simply put, whole life insurance is expensive and doesn’t meet most people’s needs, especially when considering its investment component’s relatively low earning potential compared to other options available in the market.
Exploring Good Alternative Investments to Life Insurance
Not everyone needs life insurance, especially if they don’t have dependents or substantial financial obligations. One alternative is to forgo insurance until a specific life situation necessitates it (such as the birth of a child). Another option is to select a term life policy, providing coverage for a defined period when such coverage is truly needed. Start by maintaining a separate investment portfolio, focusing on goals and returns to complement this. That way, you’re only paying for what you need on the insurance side while still making smart investments in the market to grow your wealth over time.
Despite being a popular choice in the U.S., whole life insurance is often chosen due to a lack of education about alternatives. Life insurance agents, incentivized by high commissions, may not adequately educate clients, which can lead to uninformed decisions. Many commission-seeking agents will tout whole life insurance policies as “investments,” — but there may be more suitable (and potentially higher-yielding) investments out there. Life insurance should be a risk mitigation tool, never an investment. It is there to replace future income that is lost because a primary breadwinner died.
We believe one of the times whole life policies might be appropriate is for families with substantial wealth, as it can serve as an estate planning tool to avoid hefty death taxes in those cases. If you have assets exceeding estate tax exemptions, your family may face estate taxes when you die. Life insurance payouts are not taxable and can be used to cover estate taxes.
Insurance Needs Assessment
To help you make informed decisions, consider these essential questions:
- Do you have dependents?
Most people don’t need life insurance before having kids. It is only at that point that someone else becomes reliant on their income, creating the need for life insurance.
- Do you have debts that would need coverage after your passing?
Life insurance helps ensure these debts aren’t passed on to your family after death.
- Do you have substantial assets already?
If you have significant non-real estate assets that could step in if you pass away, that is like self-insurance, and your family’s insurance needs may be minimal.
Still, term life insurance can cover all of these concerns, so you likely still don’t need a whole life insurance policy unless you have substantial wealth and need it as a tax mitigation strategy for your estate.
Whether you’re questioning, “Do I need whole life insurance?”, reviewing existing policies, or ensuring you have the right type and amount of coverage, the emphasis is on avoiding unnecessary expenses. Seek unbiased advice from a well-educated advisor.
At Pekin Hardy Strauss Wealth Management, we provide guidance on various insurance types without selling policies. The ultimate goal of any trusted advisor should be to empower you to make informed decisions about your financial future, not to score a commission off of you.
If you’d like to discuss your term vs. whole life insurance options further, we’d love to hear from you. Reach out to us to get a free financial assessment.
This article is prepared by Pekin Hardy Strauss, Inc. (“Pekin Hardy,” dba Pekin Hardy Strauss Wealth Management) for informational purposes only and is not intended as an offer or solicitation for business. The information and data in this article do not constitute legal, tax, accounting, investment, or other professional advice. The views expressed are those of the author(s) as of the date of publication of this article and are subject to change at any time due to changes in market or economic conditions. Pekin Hardy cannot assure that the strategies discussed herein will outperform any other investment strategy in the future.