Why Whole Life / Universal Life Insurance Is A Bad Idea

[MoonShadow]

I don't get why people advocate term life insurance. If you outlive your term, you may as well have gathered that money into a pile and set it on fire.

Well, they do it because all life insurance really is just term insurance, on the inside.  If I could get term that came with a contract that gave my kids an unrevokable right to renew at the original health/preference class, I'd do that.  But they call those contracts permanent insurance policies.

[Spork]

I don't get why people advocate term life insurance. If you outlive your term, you may as well have gathered that money into a pile and set it on fire.

I believe it is because, in comparison to whole life, the pile of money you're setting on fire is smaller.

You're covering a hole...  "If I die when I am young and my family is still building capital and my house isn't paid off... pay enough to cover."  The goal here really *IS* to outlive your term and lose the money. 

[Cycling Stache]

I don't get why people advocate term life insurance. If you outlive your term, you may as well have gathered that money into a pile and set it on fire.

You get term insurance in case someone depends on your income to pay debts, and then you get the amount they need to replace your income or at least get things under control.

Term insurance is very cheap when you're young and most likely to have few assets accumulated, thus making insurance valuable if you have a spouse or kids, mortgage, etc.

As you get older and grow assets, you should no longer need life insurance, because your assets are sufficient to cover your liabilities/take care of your dependents.  That works out great, because insurance gets more expensive as you get older.

So get it early (and pay very little) if people are truly dependent on your income (i.e., it's not supposed to be a windfall to a relative).  Then plan on outliving it, and stop paying once you're in a good financial position.  And yes, you'd prefer to "throw away" the money rather than die early--hopefully!

[dandarc]

I don't get why people advocate term life insurance. If you outlive your term, you may as well have gathered that money into a pile and set it on fire.

Do you also say this about your auto and home-owner's or renters policies?  Under almost any insurance policy, the best case scenario is to not have any claims, and thus be paying the premium with nothing in return.

Getting money back from your auto policy?  You were involved in some kind of car wreck.
Home-owner's or renter's?  Something bad happened at the place you lived - fire, theft, collapse.
Life?  The insured died.
Disability?  You were injured to the point you can no longer do your job.
Health?  Anything beyond the routine-care that is now required to be included is a pretty bad time.

If I go my whole life without my auto policy paying a dime, I'll be thrilled.  Why is life insurance any different?  And the term life insurance, at least for me, is much cheaper than the auto insurance.

[Merrie]

Good thread. It sounds like a lot of you are quite well versed with this life insurance thing. I would like to hear what you guys think of my policy. I sort of forgot about this policy all these years and recently called to see what would happen if I canceled it.

Canceling my policy will result in a refund of approx. $600.

My policy: I'm currently 32 and bought into a policy when I was 26. I pay $125 a month and will have to for 15 years, after which I am insured for life until the day I die. Payout is $200k.

I did the math, and calculated what my return would be if I invested the money instead. In this case, I would invest $125 per month ($1500 per year) for 15 years, and then stop.

Assuming an annual return of 7%, the investment will be worth $37,693 after 15 years.

If I then leave it, and never add to it again, it will reach $200k after about 25 years.

So, adding up the numbers: original age + length of policy + time to reach policy payout = 26 + 15 + 25 = 66.

Conclusion: The policy is good if I die before turning 66. If I live beyond 66, then it's a crap investment.

The question is then, assuming I live past 66, should I cash out for the current $600, having already invested 6 years into the policy? Obviously there are other factors that play into this decision (I'm the sole breadwinner in my family; if I invest for 10 more years beyond 66, it effectively doubles in value; calculations are based on a 7% return but it could be higher/lower, etc.).

Thoughts?

Do you need life insurance in retirement? Bear in mind your spouse and/or kids would get your assets, and you wouldn't have an income from work that would need to be replaced. Most people don't need life insurance for their entire lives. Those who do are the exception rather than the rule. Are you in decent health or have you become uninsurable? If you are still insurable, you could and probably should ditch this policy, get a term policy for a fraction of what you pay now, and invest the rest of the money. Then you can cancel the term policy or let it run out once your assets have built up high enough to not need it any longer. The "I already spent X amount" is a sunk costs fallacy; don't let it fool you. And $200k isn't a lot either when you have kids who need to be raised and put through college.

I am a 32 year old female in excellent health and pay $500 a *year* or so for $750k in term insurance. I am the high earner in my family so carry more of the insurance. My husband is 37 and in okay health aside from being overweight, and he pays around the same amount for $250k in term insurance. Just as a point of reference.