Last updated on November 15, 2019
I worked for Prudential Financial, Inc. for 20 years managing the public relations and advertising department, where we prepared the sales materials and commercials promoting the company’s insurance products. Over the years I saw many types of products come and go, but always saw that basic term life insurance was usually the best option for most people, including myself.
If you have a wife, child or any dependents, you need life insurance to take care of them in the event of your death. Most experts recommend a policy worth at least ten times your annual salary. There are two main types of life insurance, whole life, which includes a savings component, and term insurance, which is straight insurance coverage with no savings.
It is a contract between the insurance company and the insurance buyer. The buyer pays a certain amount of money for a certain amount of time and the company in return pays him even a greater amount if any unfortunate event happens.
There are several types of whole life insurance but they all share a savings component. Some types are pay a higher rate as they are based on mutual funds. Some pay a low rate but are very safe. In either case they normally pay less than you could get from a traditional savings account or mutual fund.
Whole life is designed to also be a savings vehicle, with the idea the policy builds up a cash value. In most cases, the whole life coverage is a poor investment choice and not worth the higher price that’s charged for it. The price difference is substantial. A policy for an average 40 year old man with a $250,000 benefit would cost about $200 a month for whole life and under $20 a month for term coverage. Instead of paying the $200 a month, you should pay the $20 a month and invest the other $180 yourself.
The big rip-off with whole life is that in the event of your death, your family doesn’t get the value of all those high payments you’ve been making, they only get the face value of the policy. The low interest rates and high expenses eat up most of the extra money. It’s better to just get term insurance and invest the difference yourself.
Term life is just basic insurance coverage covering you for a limited period of time or term. You pay a premium over a specific term and if you die during the term, they pay out the agreed upon benefit amount. If not, they do not refund those premiums, the policy and coverage simply stops. The plan normally is to buy term insurance to cover your family for 20 year terms. By the time the term ends, you are self sufficient and wealthy enough not to need the insurance.
There are some minor good things with whole life insurance. By combining your savings with your insurance payment, you are more likely to keep up with the payments, forcing yourself to save. Depending on your tax bracket, payments to whole life insurance may be deductible and / or may reduce your taxable income.
Before making a decision, consult with your tax professional, do not rely only on insurance salespeople for their advice.
