Is term or whole life better?

Question

So this is all very confusing to me I don’t understand the difference and what I need. I am a 48 year old female of average health. One dependent child. Trust age is offering me 20k whole life for $47 mo . I keep seeing people say term is better and to invest the difference. What does that mean exactly? How do I invest? Is this a good idea for my situation? Also I have a 401k which doesn’t have much since I just started it last year, is a 401k enough? Does it replace life insurance? I am not at all good at finance so I need this explained to me in layman terms please.

Answer 1

What does that mean exactly?

Exactly what they say, buy a much cheaper term life policy (most people don't actually need life insurance their entire life) and put whatever else you would have spent on the whole life policy in an investment account. Chances are, the investment account will earn more than the whole life policy would have, since they tend to use low-risk (and low return) investments.

How do I invest?

You can either increase your 401(k) that you mention, or talk to a local financial planner (ask your insurance agent for a recommendation) about setting up a non-retirement investment account. I would start with very broad index funds like the S&P 500 until you learn enough about different investments to diversify. Don't buy ANY single stocks until you know what you're doing (most people think they know way more than they actually do). Stay away from "planners" that are really just trying to sell you something. At this point, all anyone needs to do is set you up with an account that you can put some very simple index funds in. Over time, they can make a more sophisticated plan with you.

Is this a good idea for my situation?

We would need more details - how much insurance do you need? How much debt and other assets do you have? How many people rely on your income (and how much is that)? Any reasonable financial planner can go through all of this with you.

Also I have a 401k which doesn’t have much since I just started it last year, is a 401k enough?

Again, it depends on how old you are, how much debt you have, and how much of your income is depended on by other people. But after one year it's highly unlikely that your 401(k) alone will change anything.

Does it replace life insurance?

Eventually, yes - at some point, your investments and other assets can cover whomever is dependent on your income to survive. My term life insurance lapses 5 years from now, at which point all of my children will be out of college (meaning they hopefully no longer depend on my salary), and we'll have enough retirement savings for my wife to life comfortably for many years. Hopefully I'll life long past that and can continue investing, further reducing my need for life insurance.

Answer 2

The key here is you have a need for life insurance as you have one dependent child. Unless this child is 17.5 years old and has no interest in college you will need more than 20K.

If the unthinkable happens, first you have to be buried, the child may need some time to morn, and then have enough money to get their career started. If your child is young, some money should be provided to the family that will take care of them until they reach adulthood, then, IMHO education should also be provided for.

I would recommend a number between 250K and 500K, and this might seem impossible when you consider the cost of the whole life policy. However, you can probably buy a 500K, 20 year level term policy (meaning the premiums do not go up) for about the same price as this whole life policy which is totally insufficient.

Your child will be well protected.

Whole life is a terrible deal and should be avoided at all cost.

In order to find this term life insurance policy, use a company like Select Quote. I have no financial interest in this company and have used it to buy my life insurance.

Investing is just separate. Whole life agents will sell their product as a great long-term investment, but they are lying. It isn't. Their product is loaded with fees and there is a lot of hidden information.

Answer 3

The other answers are spot on. I'd just add that generally speaking, the higher the commission paid to the salesperson, the worse the product is for a consumer. (vacation timeshares are another classic example).

Whole Life pays a very high commission to the insurance salesperson.

They have huge incentive to sell these policies.

You are correct to stay away and to look for a Term Life policy, which is inexpensive to you and pays a low commission to the salesperson.