America Asks The Dolans: Term or whole life insurance?
Dec 5th 2007 11:30AM
Updated Jan 22nd 2008 12:19PM
Question: We're just starting a family and reviewing our life insurance. There are SO many choices! We think the toughest choice is whether we should buy whole life or term insurance. What's your take? - Jessica, MD
You know, Jessica, so many of the questions we answer have lots of "buts" or "ifs" associated with them.
But this one is about as straightforward as they come.
For young families, Ken and I recommend term life insurance. Period.Life insurance has one prime objective -- to protect those you love in case you unexpectedly die. It isn't an investment. It isn't a vehicle to fund your retirement. And it certainly isn't something you should borrow money against.
Those are some of the ridiculous sales pitches you'll hear from some insurance agents trying to sell you a cash-value (permanent) life insurance policy. Bottom line -- for the needs of a young family...enough cash value life insurance to properly insure a family is usually too expensive. We say HOGWASH to the expensive solutions to their scare tactics.
So, don't be fooled by the fancy names insurance agents have come up with a whole slew of cash-value insurance products -- whole life, universal life, flexible premium adjustable, single premium whole life, etc.
We are not saying that all of those kinds of policies are inappropriate in all circumstances, but we are saying that if you are a couple just starting a family...just say "no thanks" to all of those high-commission hybrid policies.
TERM life insurance is an affordable way to make sure your family is financially OK if something happens to you -- end of story.
With a term life policy, you simply insure your life for a set term (anywhere from 1 to 30 years) for an appropriate amount of insurance and you pay the fixed annual premium. If you die, the insurance company pays out the face amount on your policy.
Now a few things you should know...
Straight Talk Tip #1 --There are lots of different kinds of term life. Although there is no "one size fits all" easy answer for everyone, our favorite type of term insurance for many people is level premium term insurance. That means your premium stays the same for the entire term of the policy, whether it's 5 years or 20.
Straight Talk Tip #2 --The younger you are, the cheaper your premium will be -- and vice versa! It may be too expensive to buy term life as you get closer to retirement. That's one of the reasons you want to lock in your rate while you are young with a long-term policy.
Here are a few examples to give you an idea of costs: A family is able to buy $1,000,000 worth of term insurance for about the same price as a $100,000 cash value policy.
A healthy non-smoking 35-year-old man can buy $500,000 of term insurance for less than $400 per year.
Straight Talk Tip #3 -- Premium costs can really vary, so shop around. You can buy term life insurance directly from the company. Dozens of insurance companies are standing by to compete for your business with just a quick scan online. Click here for a list of some of our favorites.
Jessica, congratulations on starting a new family and kudos for starting off on the right foot by looking to protect the ones you love!
Good luck, and let us know how the search goes!
Do you have a money question for Ken and me? We'd love to hear from you! Just click here to send us your question, and we'll do our best to answer it here on WalletPop.
Ken and Daria Dolan of Dolans.com have hosted their own national radio program for 22 years, anchored their own television shows on CNN, authored six books on money matters, served as money contributors on CBS This Morning and have now launched a comprehensive web site and free e-letter at Dolans.com.