Why My Wife and I Purchased Term Life Insurance Instead of Whole Life Insurance
BY BRANDON VAGNER, CPA, Ph.D., & WALLET WIT FOUNDER
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Have you ever wondered if you should buy term life insurance or whole life insurance? Trying to find an answer to that question from somebody who is not a life insurance agent is tough, but I’m here to do just that. I’m a CPA, personal finance blogger, and an accounting professor.
The first thing you should know is that I’m married (8 Great Years) and I hope to have children in the very near future. I’m one of those guys that wants to do everything I possibly can to make sure my family is taken care of and has the best opportunity to live a good life. If there is anything that keeps me up at night, this is it. So, when we started thinking about building our family, I immediately started thinking about a lot of if/then scenarios.
In this article, I will walk you through our life insurance purchase and all that factored into it; give you a very clear understanding of what the heck is different between term life insurance and whole life insurance; and why you should absolutely choose one over the other.
My Thought Process to Buying Life Insurance
- What Age Should You Buy Life Insurance?
- How Much Life Insurance Do You Need?
- Whole vs. Term Life Insurance – Which is Better?
- How Expensive is Whole Life vs. Term Life Insurance?
- What Should My “Term” Be For Term Life Insurance?
- Where Can You Get Term Life Insurance Quotes?
- Final Conclusion – Term vs. Whole Life Insurance
What Age Should You Buy Life Insurance?
To answer this question, you have to truly understand the purpose of life insurance. Life insurance is there in case you pass away AND there is a need for your income to be replaced.
Did We Need Life Insurance In Our 20’s?
Allow me to walk you through our timeline of purchasing life insurance as an example. Straight out of college and at the age of 24, I was being pitched by life insurance agents to buy life insurance. I did have a wife, but we did not have any kids at that point. So, if I had died in my mid 20’s, the only person that may have needed my income replaced would have been my wife.
Since she was the only person who would be financially impacted by my death, we started to evaluate how likely it was that she would be able to provide for herself if I passed away. Every family scenario is different, but my wife had her Masters of Accountancy and was extremely employable. We both were very confident that she would have no trouble maintaining her current employment or finding new employment. Also, Accountants make great money. So, if I passed away, she would have been making around $50,000 as a single woman in a city where that goes a long way. All that said, we came to the conclusion that we did not need to buy life insurance at that point in our lives.
Do We Need Life Insurance In Our 30’s?
Fast forward to the present day where we are in our early 30’s, and there are reasons why it makes sense now. One thing you should know is that my wife ended up going back to school and getting her Masters in Education. That decision definitely changed her income potential, but she has a passion for teaching youth and it’s the career she really wanted to pursue.
Depending on where you live, it can be very difficult to find a teaching position that pays well enough to fully support a family. So, if I passed away today and we did have kids, my wife could very well struggle to provide for them all the way through college and save like we had planned from the beginning.
Whether I’m here or not, my job is to make sure my family has everything they need. Life is expensive, and I want the best for my wife and future kids. When I’m gone, I won’t be able to earn anymore for them on an annual basis, BUT I do have the ability to provide them with a large lump sum influx of money as soon as I pass away that replaces what I would have earned in the future. There is no better way to provide security and peace of mind to a spouse and family.
We’re planning on having kids in the very near future, and that decision led us to start looking into life insurance options. If we were not thinking about having kids at this point in our lives, we probably still would not have life insurance, because my wife still would be able to support herself. Kids change everything though.
How Much Life Insurance Do You Need?
The answer to this question is very situationally based as well. Again, I’m going to walk you through all that we considered, and I think that will help you make your decision.
A rule of thumb that you’ll hear many financial experts use for the amount of life insurance you need is between 12 – 15 times your current salary. I really like the 12 – 15 times your current salary as a general rule of thumb. It will work very nicely for most families. Here is one thing to consider though. Let’s imagine a scenario where you’ve been working extremely hard in a relatively low paying position and realistically you expect your earnings to significantly increase in the near future and that is going to provide the level of lifestyle you want for your family. If that’s the case, I’d recommend using that realistic future earnings estimate in place of your current salary.
For example, I left the corporate world to go back and pursue my Ph.D. I went from making a good corporate salary down to around $18,000/year, but my realistic earnings potential once I graduated was significantly higher than what I was currently earning as a Graduate Assistant. If we had kids during that time period and we had a need for life insurance, I would have used my future earnings for that general rule of thumb calculation.
All that said, when asking yourself how much life insurance do you need, it’s really going to depend on how much you make; how many kids you have; how close to graduation those kids are; what type of college they plan to attend; how much debt you have; and how much help your spouse will need to save for retirement. Those are the big factors to consider.
Whole vs. Term Life Insurance – Which is Better?
Keep in mind, I’m not a life insurance salesman. The first thing you should know is that there is a massive financial incentive for a life insurance agent to sell you a whole life policy. MASSIVE!
There are many life insurance agents who will tell you that a whole life insurance plan is a good investment for you. That should be a red flag. Every single investment portfolio manager alive is benchmarking their performance against the S&P 500. They are ALL trying to beat the S&P 500 performance, which, since its inception in 1928, has had average annual returns of around 10%. Whereas, the cash value account within a whole life insurance policy generally averages returns much less than that. Many experts will tell you the average return within a whole life cash value account is down around 2.5%.
The other really important thing to know is that, for standard whole life insurance policies, the cash value account goes to your life insurance company when you die. Yes, you heard that right. You only get the death benefit. For a premium, you can get a whole life policy that pays out both the cash value account and death benefit, but that cash value account likely won’t grow anywhere near the same rate as it would in a high-quality mutual fund.
The bottom line, if you really want an investment vehicle, go to Vanguard and invest either in an index fund such as the S&P 500 or mutual funds that have evidenced high returns over the long life of the mutual fund. I beg of you not to look at a life insurance policy as an investment.
How Expensive is Whole Life vs. Term Life Insurance?
Whole life insurance policies are extremely expensive. Instead of giving you average numbers, I’m going to give you a real-life example. We have some friends around our age who bought whole life insurance before talking to anybody about it. The insurance agent was pushy and got them to commit to it before they had an opportunity to seek advice.
Shortly after they purchased the insurance policy, we were on vacation with these friends, and out of nowhere my good friend told me they had just purchased whole life insurance. I about had a mini heart attack as soon as he told me. We talked a little bit about it, and they both had no clue what the difference between whole life and term life insurance is. I quickly explained and just told them they should really look into it.
Are you ready for this? They were paying $10,136 annually for whole life insurance that had a net death benefit of $742,197.
You can get that same amount of coverage through a term life insurance policy for less than $1,200 annually. What a MASSIVE difference that is. You can see from this basic example how powerful term life insurance is.
Yes, there are different things you can do with a whole life insurance policy such as taking a loan against the cash value of the policy, but my personal opinion is that it’s all smoke and mirrors.
My recommendation to all who ask me is that you should keep your life insurance policy separate from any financial investments and/or loans. I have a term life insurance policy for purposes of a receiving a death benefit and that’s it. My investments are handled completely separate through investment vehicles that have great returns, and if I absolutely needed a loan, I would go to a bank. Keep in mind, I don’t believe in debt, but if you absolutely needed to get a loan, I would not turn to the cash value account within a whole life policy.
What Should My “Term” Be For Term Life Insurance?
The entire premise of term life insurance is that you’re paying for protection for a certain period of time. Don’t freak out on me here, because I’m going to explain why you most likely do not need term life insurance when you’re old.
At the age of 31, I had a choice of how long I wanted to be insured for. The primary options I was considering were 10 years, 20 years, or 30 years. For me personally, 30 years made the most sense. So, if I die before the age of 62, my beneficiaries will get paid.
Here is why I stretched it out so long. The primary reason is that we don’t have kids yet. God willing, we would love to have 3 – 4 kids. That means, we could easily be having our last child in our late 30’s, and thus we could have a child living with us until we’re in our mid to late 50’s.
Had I chosen a 20 year term, that could have really opened up my family to a lot of financial risk if we still have teenagers in the house in our late 50’s. I don’t have a crystal ball to know what my wife’s income will look like in our 50’s, and that’s something I really have to consider. She might even be a stay at home mom, and then would really need help if I passed away. All that said, I needed to make sure we had coverage until every child was out of school and on with their lives.
You might be asking why I don’t think I need life insurance coverage after age 62. By that point, all kids should be done with college and fully able to support themselves. Also, by that time, my wife and I should have a fully funded retirement fund. So, if I passed away in my 60’s, my wife will be able to survive and live a great life off what we saved for retirement. She won’t need an influx of money at that point and neither will any of my children. Remember, life insurance is all about funding a financial need. If there is no true need, then there is no reason to have coverage.
Where Can You Get Term Life Insurance Quotes?
You can get life insurance quotes from so many different companies. I’ll give you an online option and then a more traditional option.
Online Options For Buying Life Insurance
Quotacy is one of the country’s leading agencies for buying life insurance online. You can get a quote and be on your way extremely quickly. Keep in mind, the key to this life insurance thing is to just do it. You never know what will happen tomorrow. It is extremely easy to say you’ll do it later, but for many people they don’t ever do it and their family ends up getting financially hurt because of their lack of urgency. This online option makes it extremely easy to just get something going so you have coverage and your family is protected.
Brick and Motor Options For Buying Life Insurance
I did my homework before purchasing our term life insurance, and I’m extremely happy with the rate I got from State Farm. Based on my experience with them, I highly recommend checking out State Farm for your term life insurance needs.
Final Conclusion – Term vs. Whole Life Insurance
There is a clear purpose to having life insurance. It is to make sure the people you’re leaving behind are able to support themselves once you are gone. That said, you really have to evaluate your spouses realistic earnings potential if something were to happen to you so that you know how much will be needed. A general rule of thumb is that your family will need between 12 – 15 times your current salary. That should be the death benefit you’re looking for when you get life insurance quotes.
You want to make sure you do not confuse life insurance with an investment opportunity. In my experiences, segmenting purposes is the key to everything in life. The purpose of life insurance is to give your family a benefit upon your death. Nothing more. Term life insurance does a wonderful and cost effective job at doing just that. If you want to make a good investment for yourself, I’d refer you over to a platform such as Vanguard for all your investment needs. That’s what Vanguard does best. That said, there is no need to try and get a return via a whole life insurance policy. If an agent is trying to sell you whole life insurance, you should be extremely cautious. It’s typically not going to be in your best interest.
You’ll also want to make sure you get the correct length of term life insurance. Many people make the mistake of not purchasing enough years of protection to ensure their family is covered during critical years. On the flip side of things though, you likely won’t need life insurance really late in life. By that time, your children should be done with college and you should have a well-funded retirement fund. That said, if you pass away late in life, nobody will need a benefit upon your death.
I hope this article helps you make your all-important life insurance decision. Term life insurance is what my wife and I decided on, and I strongly believe it is the better choice for most people trying to decide between term life insurance and whole life insurance.
Thanks to all the Wallet Wit readers! I hope to see you back reading all the other great articles, and I appreciate you sharing the website with your friends and family! Let me know what you think about this in the comments.