All Life Insurance Tips - Whole life vs term debate?

Whole life vs term debate?

Hi Everyone. I just started a new career with the guardian insurance company last week. all I hear about is the debate with whole life verses term and investing the difference. I wanted to find out which one really was better for my clients. i did a little tests using the software that I get from my company which will give you the prices of an insurance policy and and all of the cash values and everything else you would want to know to help find which product is right for your client. here was the test.... i ran the numbers for a 25 year old male, preferred no tobacco rating. i ran these numbers for a guardian level 30 year term policy and a guardian paid up at 99 whole life policy both for a $1,000,000 face amount. here are the results. Results: the whole life policy costs 8,560 dollars per year. the term costs 1,340 per year. a difference of 7,220$ after the 30 (year 31) year period the whole life policy would have a cash value of $682,203 and a death benefit of $1,834,475. had you invested the 7220 a year for 30 years and got about an 8% a year return (about 6.7% after taxes) you would end up with $689,580 with a death benefit of 0 since your 30 years was up. term: 689,580 in cash and 0 death benefit. whole 682,203 cash value and 1,834,475 in death benefit which will increase every year till death as long as premiums are paid. seems to me the whole life is the better deal as cash is about equal but the death benefit is still there and is very large. The ending values assmues that dividends will be paid on the policy at the same rate as 2007 dividend rate. those can obviously go up or down and guardian has been paying dividends since 1860. what do you guys think?? great post insurance guy. you are right. it always depends on the client but at least from my illustration you can see that whole life is a horrible product like most everyone on here says. sometimes it might make sense. from my illustration a 25 year old who does have the cash flow to pay his 8,000 premium and is trying to save for retirement might really be a great fit for this whole life policy. someone who can not afford to put away that much might not be a great choice for my illustration. sorry guys, in my previous response there i wrote that whole life is a horrible insurance product. what i meant to type was that whole life is not a horrible product. To Ronkpaws: when reading your comment, i cant help but think you did not even read my origional post. your example of the $25 vs 100 premiums, buy term and invest the difference, is the exact illustration I made, just on a larger scale. and you can clearly see the results of my illustration.

Public Comments

Whole life is junk
I think every person is different and every situation is different. What I do for my clients is provide flexibility. What is the best route to go from NYC to LA? The answer depends. Some people want to get there fast so the interstates are the best. Other people want to enjoy the ride and stop along the way to see the sites. Perhaps the drivers want to avoid the big cities. Sometimes weather can close certain routes or make those routes more time-consuming. Result: there is NO best route. The same applies in insurance planning (and financial planning). It all depends on what you and the client want to accomplish. So many things can change over a person's life that flexibility becomes important. As a new agent you will meet a lot of prospects who should have had more insurance earlier in their lives but now they have a medical condition that prevents their acquiring more insurance now. One size fits all only applies to hats. I have found that a combination of term and permanent (whole life OR universal life OR variable universal life) work the best. There are no restrictions against owning more than one policy. Get a mentor.
Think of it this way. If you had a whole life policy that cost $100.00 a month, and you had a term life policy that cost $25.00 a month for the same amount of coverage. Buy the term life policy. If you pay 25 a month on the policy and put the other 75 dollars in something that makes more money on the interest rate, you will be much better off. Whole life insurance just makes the insurance company rich, not the policy owner. I feel bad for people that get talked into whole life policies, when they could use the extra money to build a emergency savings account, in cases like, losing their job or medical emergencies.
I think there's one variable that everyone missed with your analysis! DIDN'T you state that the whole life policy was paid up at 99? If that's the case, isn't the client paying into this product for 74 years? Maybe I missed something, but that would make the WHOLE LIFE product a TERRIBLE deal. Buy term and invest the rest. Just like all the ads tell you to! Your client will have much more available cash as they may need it at a much lower cost over time.
It is always interesting to me, to see a financial product (or anything) that is designed for one particular purpose, to be twisted into something else for the gain of the sales corporation instead of the client. Life Insurance is, primarily, designed for income replacement in the event of premature death during the earning period of one's life. If a 25 year old invests properly, takes care of his business, and retires debt-free, which his investment will allow him to do, he will not need the insurance during retirement, thus will not need to continue those payments. Also, in MOST cases, the death benefit is exclusive of the cash value and is, therefore, misleading to the client, as well as, any loans from that cash value, counting against the death benefit. Whole life products are more expensive in the front end to take advantage of the time-value of money, giving the company a greater amount of money to cover their bets by increasing THEIR returns, not the clients'. (other discussion points could go on and on for pages, but I desire to shorten this.) In your example, you lower the return for taxes. When I advise a client, I help them defer those taxes to increase their returns, not paying annual taxes on a retirement account until withdrawal, OR I help them with a ROTH IRA. I have NO 25 year old clients that do not average over 10% annual returns, even with lowered risk profiles from the general stock market. Any company-generated software manipulates data to show their own products in a slightly different light. That is just packaging of the data, not really lying. Still, it helps sell their OWN product. My job, and yours, should be to help the client. If we can do that with our products, great, if not, well, that is great too. We will help someone else, later and better educate our public on personal financial matters, which is more important for this country than most realize. I have many clients that I cannot improve their current life insurance situation, but I can usually, almost always, help them amass more wealth for retirement and properly protect those assets along the way. I do that, not by pushing my company's product as much as I do finding SOME vehicle that most meets their needs. In summary, I have seen one or two situations in which a properly set up variable life product was good for a higher income self employed individual needing to tax-shelter large amounts of money for a short period of time. This is ONLY beneficial when using a high death benefit of $750k to over $1 mil. So, in your particular example, there are some cases in which this could help a narrow section of the over-all market. However, there are, now other less expensive vehicles that do the same thing for the client. The key is, there, what costs the client the least, reaches and surpasses their financial goals, and most completely covers their potential losses. The number of clients that whole life can help achieve those goals is VERY few, indeed. Unfortunately, those examples are used to persuade many other clients whose needs are different (usually much less, in reality) to spend more for a product that delivers them less, in the long run, and thereby leaves them with less money in their retirement portfolio. Bottom Line: If you charge a client more for something that he could have gotten for less, have you helped that client, or merely yourself?
It isn't just the fact that with the whole life you would have had the insurance and the cash value... taxes also must be taken into account. Under current tax law, cash value may be taken as a policy loan from a whole life, universal life, variable life, etc. completely tax free so long as the policy never implodes on itself. Use taxable equivalent yield when comparing buy term invest the difference with whole life. Buy term invest the difference is mainly touted by one company in the business who markets to people with very low incomes: Primerica. Hope this helps.
Well, you can't do a "carte blanche" statement about which is better. Both fit certain needs. I don't LIKE whole life, and rarely recommend it. You didn't factor in a couple of things here: 1. Most people only keep a life insurance policy a few years. Most people die without life insurance in place. So if you factor in the "I'm only keeping this until money gets tight or the wife gets mad", then the cheaper policy is the better deal, as ALL the money you pay in the first few years is lost. 2. The need for "coverage" drastically decreases after the kids are out of the house, and after that mortgage has been paid of. The fact is, most people (who can afford to pay the premiums) DON'T need life insurance in the later stages of their life - when they're more likely to die. 3. The "return" on your money in the later stages, comparing the life insurance to, say, an indexed stock fund, well, life insurance is NOT a good monetary investment - if THAT'S the goal, you're better off in the market. Having said that, people all have different levels of risk comfort, and the "guarantee" of life insurance (and annuities, for that matter) sometimes people would rather pay through the nose for that "guarantee" than handle their own money. Using life insurance as an investment is the most COSTLY way to invest your money. But some people prefer it anyway.
LOL your still operating under the assumption that you recieve both the cash value and the death benefit. NEVER EVER, EVER HAPPENS. With all cash value insurance YOU GET ONE OR THE OTHER, YOU WILL NEVER, EVER GET BOTH. YOU ONLY RECIEVE THE CASH VALUE OR DEATH BENEFIT. There is no debate. Do yourself a favor and read this. http://www.amazon.com/Whats-Wrong-Your-Life-Insurance/dp/0025293508/ref=sr_1_1/002-3180185-7355244?ie=UTF8&s=books&qid=1190645988&sr=1-1
My answer to your solution: 25 yo m, preferred, non tobac- $1 million face amount. My quote for exactly the samr 30 yr level term- $1168.56 per year. I have saved him $7391 per month vs WL. Versus your term- just under $200/ month. I invest him in mutual funds, as tax advantaged for him as I can. But we'll just say it is like you say 8% adjusted by 1.3% for actual rate of 6.7%. That is $600 per month is being invested, I don't believe your WL will invest this amount, will it? Oh, and I am adjust inflation by 4%. He will have $693,947.28 in my program. Under yours, $682,203. Wow! That's pretty close. Under my program, he will have spent $35,056 compared to $256,800 in your program. Oh, is yours a Universal Life or VUL policy becuase these are the only two types that I can think of where the death benefit fluctuates? I have seen a couple of these types of policies and after abot 20 years they are designed to self destruct. Why? Because of cost of insurance- these policies use annually renewable term. The cost of which goes up every year. So that, it equals the premiums going in by about the fifteenth year. The following year it is more than the premium, so the company TAKES money out of the cash value to make up the difference. After several years of this, there is NO cash in the cash value, they get a letter saying you need to pay us this much more to keep your insurance, or there is no more insurance- once out of cash value there is no more insurance. Did your calculations take into account that there is no cash value for the first couple of years? So yours only has 28 years to compound; mine compounds from the first payment. See artaicles below relating to cash value insurances. And I do work with Primerica. Proud to, as you can see with the comparison.
Here are some things to consider before you make a blanket statement that WL is better: 1. You should compare the Guardian WL against the term available on the open market if you are really trying to save cash flow. There are plenty of competitive, high quality companies. 2. The illustrations you ran it on are probably based on the Guardian's dividend history. The future performance of your retirement account hinging on the experience of one company represents a concentrated business risk on the part of the policy owner. I know it's a strong company, but there are lots of strong companies you should not hang your hat on. 3. What's your plan on getting the money out? You described a NQ investment account, however, the life policy is tax-deferred. When are you going to pay taxes? The NQ actually looks better from this standpoint. 4. If you responded to #3 with "loan", is Guardian a direct recognition company (will they cut the dividend, if any, when you borrow against the policy)? Is the interest rate you are being charged make more sense than paying taxes 30 years down the road? 5. The other (and more comparable alternative in my mind) is to do a 1035 to an annuity to keep from recognizing the entire gain in one year. Many people hate annuities and now you need to explain why buying an annuity in 30 years makes more sense than just having a NQ account. These are just a few highlights that came to mind, and certainly not exhaustive. I'm not saying that WL for protection and retirement won't work for someone, but it's a difficult subject, not an easy one.