When Is Whole Life Insurance a Good Idea?

Transcript

Question from “gimme bananas”: It says “Money Guy Show, you guys talk about term life insurance for most people, but do you ever suggest whole life for certain people? What scenarios does the Money Guy Show suggest whole life?”

Brian, I’m gonna leave the scenarios for you that we would suggest whole life, but let me tell you why we like terms. For those of you who aren’t familiar, when you go to buy life insurance, you’re essentially given two options. You can buy term insurance, which means “I want to make sure that I’ve got this much death benefit for this amount of time, and I’m gonna pay this much money.” That’s a term policy. There’s another option that says, “Hey, I don’t know when I’m gonna die, but I want to make sure that when I die, my life insurance pays out.” That’s called whole life insurance or permanent life insurance, and there’s a bunch of different variables and different kinds within.

The reason that we love recommending term insurance is that it provides the most bang for the buck. If you were to go look at a million-dollar term policy or a hundred-thousand-dollar term policy versus a hundred-thousand-dollar permanent or million-dollar permanent policy, you’re going to see that the costs aren’t exponentially different. The permanent whole life insurance is gonna be way more expensive than the term insurance. So for most people who have an insurable need on their lives, they tend to be earlier on in their accumulation phase, they tend to have people that are depending on them, whether it be a spouse, young kids, or debt service that has to be taken care of. So the goal is to get that coverage in place at the lowest cost possible. Well, for most folks, term insurance satisfies that. I would say probably for the vast majority of folks, term insurance is the type of insurance that they need.

But gimme is asking a different question. Brian, are there ever any scenarios where term life insurance is not the solution? There are times when a permanent policy would make sense for someone. The answer is in the title of these two different insurance products. One is called term, one is called permanent. Now, you asked about whole life. That’s a version of permanent insurance. I’m not going to answer it specifically on whole life because I’m going to talk about the whole broad category of permanent insurance. When you say term, that implies that the need goes away, and that’s exactly if you’re buying insurance to replace if you prematurely die and an income replacement is needed. If you’re saving for the future and you know and you’re a financial mutant, that need will have a term expiration on it, that it will go away, and that’s kind of how you’re buying the insurance. I don’t know if anybody’s ever explained these basics. Is that you’re hoping that when your kids are born 20 years in the future, you’ve saved enough or your assets have grown enough with the savings you already had when you bought it, that you’re self-insured now and you can afford it.

Now, there are other situations, and I don’t mind giving an experience share on this, where the need doesn’t go away. It’s a permanent need. Let me give you an example from earlier in my career. If you can believe it, the estate threshold was like $675,000, meaning if you had an estate worth that, you could pass it over to your spouse tax-free. But beyond that, there was an estate tax, and remember this thing was like 50-55%. So it was still one of those things where you had to plan accordingly.

So, it was not hard for people to have an estate tax that was looming and sitting over them with their small business, their farms. Even if you just had a house in California, it seemed like you had an estate problem. So that opened up immediately for a need for a lot of people. If you had not thought of this concern and somebody brought it your way, like I had a business owner who had built a very successful business, I had a bunch of real estate. All these things are very illiquid. Business is illiquid. Selling real estate on the fly is not the way you want to do it. And we realized, “Hey, this person had a lot of net worth, but not a lot of liquid assets. If they died tomorrow, holy cow, the government is going to be the only beneficiary here, because they’re going to have to get rid of these assets. They’re going to pay this tax, tax.”

So what do you do when somebody who’s got a permanent need, because you’ve got to pay the taxes, but you don’t have access to liquid? You go buy permanent insurance, because you know that’s the way we structured this, or looked at it at the time. If this person paid this premium per year, they were guaranteed to have coverage until the day they died. Matter of fact, I think it was even written into the policy that if they lived beyond a certain day, the insurance company had to give them all their money back. I mean, is it kind of that Methuselah, you know, provision in there? So just in case we figure out something that lets us all live a gazillion years longer, a lot of old insurance policies had provisions where you get all your premiums back. So the client loved that. So I have done permanent insurance or recommended permanent insurance for clients in the past. I’ve even got those experience shares. But for the vast majority, they just need a term policy. I mean, and I don’t mind being confessional and tell you, you know, I have a lot of term. I have zero permanent on my life because everything I need, I think I can self-insure beyond a certain point. And it’s reflected that I’m not anti-insurance, but I just want people to know the facts. I do feel like a lot of people get sold products because they’re highly profitable to the person selling them. You just, that’s why you need to know the why, well, you know? And it’s built into the title, term versus permanent.

Want to know what to do with your next dollar, you need this free download: the Financial Order of Operations. It’s our nine tried-and-true steps that will help you secure your financial future.