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Most of what I read says, "whole life insurance is not for you", but they don't elaborate much more than that. There's even less about term life insurance that has an option to convert to whole life insurance. Are their benefits to purchasing term life insurance with an option to convert to whole life, and what type of consumers should purchase it?

I'm aware that financial advisers receive high commissions on whole life insurance, and that you can receive better rates of return on many other investment vehicles.

mhoran_psprep
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Hoppe
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2 Answers2

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Whole Life is just an insurance product and an investment product wrapped into a single package. The only advantage is that since you're forced to make payments to maintain the insurance, you're forced to invest. It's really just the "Christmas Club" or payroll-deduction idea, though it tries to claim otherwise.

If you're unable to make yourself set aside money for the future without that pressure, this advantage may have some value. Otherwise, probably not.

And there are significant disadvantages. You're giving up the ability to control your own investments, and paying for the convenience of not having to (or being able to) think about them. Not just in the agent's commission, but in paying a relatively high ongoing rate for the investment "brokerage" service -- and keeping those fees low would make a significant difference in actual rate of return, which compounded over the years can make a large difference in actual earnings.

There's no free lunch. The insurance companies offer this because it makes a profit for them. That profit can ONLY come out of your pocket.

keshlam
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Amen to what keshlam said. Whole life is sold to make a commission; term insurance is bought to protect your family.

Whole life, or term & paying more for option to convert, is a relatively expensive investment. Big commissions, up to 40%. Only worthwhile in unusual tax situations. If you're in one of those, the team of tax consultants and actuaries in the law firm you've retained to manage your assets will advise you. And I wish your chauffeur, butler, housekeepers, security team and estate manager well.

The biggest disadvantage of whole life is this: for someone who has young dependents, you need a LOT of life insurance, ~ $250k per dependent, so for two young kids and a nonworking spouse, minimum $750k. Folks in that situation usually don't have enough cash flow/income to buy enough whole life to protect their family. So whole life diverts attention from the real question about life insurance: if you die, who starves? If the answer is "Nobody," you don't need it at all.

Term is pure insurance: you're hedging against the possibility you'll die and your kids will go without; the company bets you won't, and sets the odds a little or a lot in their favor. SBLI or insurance thru your alumni association, or thru NW mutual is often the best deal. Look into disability, too. You're 3x more likely to have a period of disability than die.

So tell the salesman "thanks, but no, thanks" and buy SBLI/alumni association life insurance if you need any.

Much better investment is 401k or IRA- if you put away $1000/yr for 10 years starting in your 20's, that's probably all you need. Magic of compound interest.

See "the only investment guide you'll ever need" for an entertaining discussion of finances.

VWFeature
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