Editor’s Note: Here’s a special contribution from Chris Huntley of Insurance by Chris.
Are you considering buying life insurance in the near future?
Before you do, take some time to learn about the differences between term and whole life insurance. Here are PT’s thoughts on the subject.
You’ve probably heard financial advisers like Dave Ramsey and Suze Orman slam whole life, and wonder who buys that anymore, but in fact, Americans buy it…a lot of it.
You’d probably be surprised to learn that about 2/3 of all individual policies sold in America are whole life.
While I believe whole life has its place in very select few “investment” portfolios, I don’t believe it should be anyone’s go-to investment product, and certainly shouldn’t be outselling term life insurance at a 2 to 1 pace.
Introducing a Rebellion
That’s why today I launched the Whole Life Insurance Rebellion!
The Rebellion is a movement to educate consumers about the risks of investing in whole life.
Over the coming weeks venerable sites such as Nerd Wallet, PlantingMoneySeeds.com (owned by our friend, Miranda Marquit), InsuranceLiteracy.org and the Huffington Post will be carrying news about this historic movement.
…and if you’re considering whole life, I highly recommend you visit the Rebellion headquarters and get educated about whole life.
Rebellion headquarters is filled with information and helpful links to help you make a wise decision about term vs. whole life for you and your family.
Here are a few highlights.
Where Whole Life Insurance Fails
The goal is to get people to see that Whole Life Insurance should not be used as a preferential investment vehicle. It’s a simple numbers game. Term insurance offers a fantastic safety net without the huge expenditure. “Buy term and invest the rest” has become so popular because of the following weaknesses of Whole Life Insurance:
1. It’s Complicated: Warren Buffet has some great advice: “Never invest in a business you can’t understand.” This holds true for life insurance. Many, many whole life is consumers are confused by what their policy offers in terms of benefits, supplemental retirement income & life insurance. They also don’t fully comprehend the true costs, rate of return and pricing. This is not a straightforward product and it’s up to life insurance agents to be clear and concise in their explanation.
2. It’s Expensive: Yes folks Whole Life Insurance on average costs you 10 – 20 times the amount of money you would pay for term coverage. I hear you, whole life insurance has a cash value component, but this is more complicated than you would think with fees and commissions.
3. Heavy Upfront Fees and Commissions: For the first 10 years of your policy you will see little return after you pay all the administrative fees and commissions. In a world where everyone wants to get the sacred “compound interest”, you simply CANNOT be in an investment that yields little to nothing over the first 10 years.
4. Lack of Flexibility: Should anything unforeseen happen to you in the first 7 – 10 years of your policy and it lapses you will lose most of your investment. Whole Life insurance is not flexible.
5. Unimpressive Rate of Return: On average the rate of return for the life of your whole life insurance policy is 3 – 4% – Dave Ramsey claims it’s even lower at 2.6%. You can do better than this independently, even in a taxable environment.
Where Whole Life Insurance Works
This is not to say that Whole Life Insurance doesn’t have its place. We do endorse some very limited circumstances:
- Small whole life insurance policies ($5,000 – $20,000) to cover burial and final expenses.
- Those with high-risk medical conditions that only qualify for “guaranteed issue” policies built on a whole life chassis.
- Term to whole life conversions, when no other options are available due to deterioration in health.
- Wealthy individuals, where return on investment and risk are not a factor, and other benefits like asset protection, hassle-free set up of deferred compensation or supplemental executive retirement plans, are present.
Having mentioned some of the problems I see with whole life, I should say that this rebellion is just as much of a condemnation of life insurance industry practices and how whole life insurance is currently being sold, as it is an indictment of the product itself. We would like to educate consumers about their options without the pull of personal gain.
The problem is bigger than just the product. It’s about greedy insurance salesmen with no fiduciary duty to their clients.
Enter the Insurance Consumer Bill of Rights.
Ethical Obligations and The Insurance Consumer Bill of Rights
Doctors take the Hippocratic oath and financial advisors the Fiduciary oath. These are ethical codes professionals swear to live by in the execution of their duties. As of today, the life insurance industry has no such code, which is a travesty.
Tony Steuer (InsuranceLiteracy.org) has created the Insurance Consumer Bill of Rights on Change.org, which seeks to implement a similar code of conduct in the insurance industry requiring all agents to act in the consumers’ best interest. The desired result would be agents targeting consumers’ specific needs to provide them with the most affordable and appropriate life insurance for their unique circumstances. Insurance agents should be held accountable for the advice they offer.
Join the Whole Life Insurance Rebellion and sign the insurance Consumer Bill of Rights today.
Educate Consumers So They Can Make Better Decisions
The Whole Life Insurance Rebellion provides an opportunity for consumers, life insurance agents and personal finance consultants to clarify the ins and outs of this complicated product. Whole Life Insurance should not be used as an investment.
Take the cash you save by purchasing a Term policy and invest it in a vehicle that will optimize your personal set of financial circumstances. If you know what you are buying you will be in a better place to make an educated decision.