We hear so many objections to whole life vs term in our industry it is time to address the big ones. Below are the two you have heard the most by people that are unaware or unwilling to look objectively at the whole life.
- Whole life is expensive and those agents are just lining their pockets.
- You will not have any debt after the age of 65.
There are many ways to buy life insurance but you most likely are only aware of one, but for the death benefit. Almost every new client I have asks me the same questions, how expensive is $X amount of life insurance going to be? Will I be able to afford it? There are many other ways to view life insurance but today’s blog is going to address the cost of that death benefit. (Next weeks blog will be on traditional whole life policies vs infinite banking policies.)
Just as you are taught to take a loan that has an affordable monthly payment, you are also taught to buy life insurance on affordable monthly payments. This is so very incorrect in both cases.
Just like anything you purchase you should not be looking solely at the monthly payment. You should be looking at what those payments total over the said period of time. For example, we know a home doubles in cost if we do a 30-year mortgage and take the full 30 years to pay it. The monthly payment does NOT matter, it’s the total amount paid out that matters.
Just as term insurance is a smaller monthly payment we have to look at the total amount paid out over the specific time period.
The True Costs
In order to get the true cost of insurance, we need to compare the term against the whole life and make them as close to apples and apples as we can. In order to do this, I have run two illustrations exactly the same. Both these scenarios are for a 35 yr old male. Standard health. Nonsmoker. Death Benefit of $500,000.
This comparison will be from age 35-80 because a whole life policy will is for your WHOLE life! It does not a have a stop period until age 121 or death. If we are going to compare premium dollars paid until death we must look at the ave age of death for the U.S. male and that is 80 yrs old.
Here is a summary chart of what you are seeing on the illustrations provided at the end of this blog.
As you can see like your mortgage the total payments made for coverage is what is significant. In this case, you just paid out nearly double the premium for 45 years just to get less coverage, in this case, $132,835 less in coverage.
I am not even addressing the cash value you get to use throughout the life of this policy but I did circle it in red for you to see. That too will be addressed in next weeks blog.
Not Needed After age 65
I can hear you already telling me you won’t need insurance after age 65 because all your debt will be paid for. This idea has become something of the past just as retiring at age 65 has become something of the past.
Alicia H Munnell on the Over65 blog writes according to the Federal Reserve’s Survey of Consumer Finances, in 2010 54% of pre-retirees and 41% of those 65-74 had a mortgage on their home. And the median amounts of these mortgages were not trivial – $97,000 for pre-retirees and $70,000 for new retirees. About 41% of pre-retirees and 32% of new retirees also had outstanding credit card balances (median balance about $2,200) and installment loans (median balance about $11,000). About 9% of pre-retirees and retirees faced debt payments that exceeded 40% of family income. (http://www.over65.thehastingscenter.org/more-are-retiring-with-mortgages-and-credit-card-debt/)
Seniors are also paying down student loan debt and caring that into their later years. We are also seeing more and more baby boomers going back to school so they can continue to work. This, in turn, causes debt in the form of student loans. According to the Federal Reserve Bank of NY, two million seniors in the U.S. who are 60 and over have student loan debt. These seniors owe 4.2% of all student loan debt which totals about $36.5 billion reported Bonnie Kavoussi from the Huffington Post. (http://www.huffingtonpost.com/2012/04/02/student-loan-debt-senior-citizens_n_1396713.html)
I could site more and more statistics but there really is no need as nearly half of those age 65 have debt. That is either their own debt or their kids and grandkids debt. You do not want to leave this burden on your family. If you have a term policy that runs out at age 65, that is exactly what will happen.
What happens when you are 65 or even maybe 70 and that term policy is up. If you are lucky enough to still be healthy at that age you can get another term policy but as shown above, you are going to pay for it, 1,500% more for it! Look at the illustration for the term and look at the premium costs over the age of 65!
I have seen this scenario of a term policy is up, first hand. It happened to my father. He bought into the term option and waited until the last minute to get another policy and low and behold he was uninsurable! Now they sit with debt (farmers never stop buying land) and any policy.
But… You ARE Debt Free
I am going to share a scenario with you. Let’s say you and your spouse are debt free, kids are gone and you are both still working because you are not yet retirement age. You have done as you were told and you opted out of life insurance because there was no need. One of you passes away suddenly now have lost the monthly income they were bringing home. That income was keeping you out of debt and your income alone can not support the household for many years to come. You now will start accumulating debt because there was nothing in place to cover that loss of income.
Term insurance has a great premium while you are under age 65. That is because only a quarter of the population dies before the age of 65. Should you need it after that when death is more likely you are going to pay for it and 1000% more! Whole life has it all factored in that you will die at some point through the life of the policy. They know they have to ensure you until age 121 and if you outlive that they know the policy will endow, at that time, and you then get the death benefit paid to you at that time.
Total amount paid out over your lifetime is a far more important number to look at then monthly amounts. You may be able to afford less in your 20’s then your 40’s but you surely can’t afford ten thousand more in your late 60’s and 70’s. Be sure to get the best option for you, whole life does not have to be thousands of dollars a month.
If you want to see the cost of insurance over age 80 just look below at the illustrations. The term illustration goes to age 105 and the whole life to age 121. Now, as far as I know, I do not believe you can even buy a term policy to go that long, at least the software didn’t allow me to even run it at later ages. However, they do show us what the premiums would be to that age and it’s crazy.
Also, remember this comparison was done using a traditionally set up whole life policy. Here is FiscalBridge we do not set policies this way as is it not the best option for the insured. In this blog, we just wanted to compare apples to apples for $500,000 in coverage. To see a comparison of traditional whole life policy vs an infinite banking policy we will be covering that in next weeks blog.
Moral of the story, do not believe everything you hear. Make sure you are remaining open-minded and doing what is the best long-term. Times have changed, healthcare is now government funded and costing us more than ever before and money is being printed at outstanding rates. You need to start planning and utilizing your money correctly.