Whole versus term life insurance discussion on Bogleheads forum

Some readers probably already know that I am into the “buy-term-and-invest-the-difference” philosophy as far as life insurance is concerned. I am especially disgusted with financial advisors who peddle whole life insurance just to line their pockets and often doing it without any regard as to whether the whole life insurance is suitable for the client or not.

Recently, on the Bogleheads forum, there is a long discussion weighing in this issue. I think it is quite a balanced discussion with many issues raised and debated. HERE is the link to the discussion.

I end this blog entry with a post by nisiprius:

First of all, every source of unbiassed advice I’ve ever read, starting with Consumer Reports in the 1960s, says it is better to “buy term and invest the different.” Nobody has ever recommended whole life except someone who was selling it.

Now, yes, the “enforced savings” feature of whole life is a Good Thing. So you should make sure you really do “invest the difference” by setting up some kind of automatic deduction from your paycheck that goes into some kind of investment account. Believe me, this is easy to do. Any mutual fund company or brokerage will fall over themselves with happiness to make this easy for you.

There are two reasons for this. First, term life insurance is pure protection, and you can only get it from an insurance company. Whole life is a combination product which mixes up the insurance you need with an investment component. There’s nothing magic the insurance company does with the investment that you couldn’t do better yourself, the investment may not be quite what you need/want, the insurance company always rakes in more than the expense ratio of a good mutual fund, and you’ve pretty well locked yourself into the investment for no good reason.

The second reason is that most people can afford enough term insurance and can’t afford enough whole-life.

Remember that the need for life insurance is temporary. Once the house is paid off and the kids are through college and you’ve got a few years’ salary saved, you don’t need life insurance any more. The purpose of life insurance is to provide an instant estate for your dependents if you die before you’ve managed to accumulate enough to provide for them. As the kids grow up, fewer dependents. As you accumulate, eventually you have enough, and your spouse does not need the protection of life insurance.

The cost of term life insurance does increase as you age and starts to skyrocket somewhere around age 55. But that’s not a problem because it doesn’t cost much and you usually can afford to pay the higher premiums as your career advances. The time the premiums become really huge is about the time you don’t need the insurance.

Oh, a tip: buy several smaller term policies, not one big one… because there is a point at which you both need less and can afford less, but still need some, and it’s helpful to be able to cancel the policies one at a time, instead of all at one [once].

Having said all that, buying whole life is not the worst thing in the world that can happen to someone. I think, yes, you should bail if you still can. I think you should buy term and invest the difference.

Yes, if the insurance agent is any good he or she will manage to make you feel lousy about it. Tough it out.

1 Comment

  1. Belkis

    Thanks for the great tips.


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