Does it make more sense to buy a term life insurance policy and invest the difference in payments, rather than to buy a whole life policy?

Yes.

It depends…
I have a VUL or variable universal life policy.

would say yes, but it depends. In my early 20's I had a neighbor who was an insurance man. He talked me into a whole life policy. It did commit me to fund it for a shitload of years. I am sure it made him some $ over the years. Decades later I still have all the $ I paid into it. Plus some appreciation.
So in answer to your question. Sure I could of invested the $ and made more in return. But I also could of just spent the $ and had nothing now vs having all the $ I put into it plus the appreciation if I want to cancel the policy to have all my $ now decades later. So for me. I wasn't a bad way to save $. And had I been hit by a mac truck it would have provided for my family.

ORC pretty much sums it up well. If you can truly commit yourself to a consistent long term investment program, you will come out far ahead buying term and investing the difference.

However, if life happens and somehow good intentions fall by the wayside, then a "forced" contribution plan such as whole or universal life is certainly better than no plan at all.

-former life agent

Agent here.

Depends on how old and healthy you are. Yes, the theory behind term is that you invest the difference between term and whole life. And when the term expires and your needs change (kids out of the house, house paid off, etc), you have that cushion. I have never once ever met anyone who has done that. But then I only deal with the 55+ crowd and usually low income.

quote:

Originally posted by chellim1:
It depends…
I have a VUL or variable universal life policy.

In the biz we call those "surprise term." As long as you know how those work, then all good. Again, never met anyone with one of those who knew how they worked. You have to make higher payments as you age.

Assuming you are already doing appropriate retirement planning, then there's no need for your insurance to have an investment component or be permanent.

Let's say you have ten or twenty years more working time left. You buy a policy that protects that income stream. Once you have satisfied your financial goals, then there's no need to insure the income.

That said I have a little $100,000 variable life policy (that is funded properly). I think after 20+ years I only have a little more than I paid into it. I like the idea of making sure there's enough money to incinerate me and dispose of the ashes.

quote:

That said I have a little $100,000 variable life policy (that is funded properly). I think after 20+ years I only have a little more than I paid into it. I like the idea of making sure there's enough money to incinerate me and dispose of the ashes.

That's actually one of the few instances where a cash value policy makes sense. Just something small to take care of funeral expenses, maybe legal fees, etc.

Something else to consider is insurance for you little one. My three kids are nearly grown now, but my oldest had a major life changing event when she was 13, she was diagnosed with Type 1 Diabetes. Her pancreas stopped functioning properly. We only had a small $25K policy on her and she will never be able to get any other insurance or increase her limit. No insurance company will touch a T1D client and those who will charge insane fees for it. We have zero history in my family for T1D and it is not hereditary. Most that get it, occur when they are in the pre-teen stages like 12-13 years old. No one really knows why. Just something to consider.

Like others have said, invest your money wisely and get a good Term policy. If you do consider some portion of Whole Life or Universal Life, stick with Whole Life as the fees are fixed while Universal keeps up ticking over time that can erode its value.

Welcome to fatherhood!

Term.
Dave Ramsey explains better than I could as to why you shouldn’t use whole life. I’m not a dyed in the wool true follower of him - but using his steps has held us become debt free. Our cars are paid for and our home. We do keep a credit card bc you need one to order stuff off Amazon and buying a plane ticket if someone dies and we gotta fly there.

We bought a couple of Whole life policies when our first was born. It was explained to us that over time the dividends (that we had reinvested to buy additional paid up benefits) would increase and eventually the dividends would be able to pay the premium.

The dividends have increased each year but 37 years later we’re still paying dividends (although much closer…)

About 10 years after that we bought larger term policies and about 10 years ago as the original terms were set to expire bought more. When these expire we won’t be buying any more as we virtually have no debt, kids are on their own and we have enough assets to cover anything that could come up…

I would get level term, 20 or 25 year policy to start. When the kids were young I had two policies, one out now, a few years left in the other.

There may be lower cost options available through work, look there also. Give a little thought to a 529 college savings plan. Some States have better options, including State tax deductions. My younger son went in the military, I am able to fund his Roth IRA with 529 money up to $35k with a recent change.

quote:

Originally posted by jcsabolt2:
Something else to consider is insurance for you little one. My three kids are nearly grown now, but my oldest had a major life changing event when she was 13, she was diagnosed with Type 1 Diabetes. Her pancreas stopped functioning properly. We only had a small $25K policy on her and she will never be able to get any other insurance or increase her limit. No insurance company will touch a T1D client and those who will charge insane fees for it.

Not true. Depending on what state she lives in, there are plenty of companies that will take her level and then there's always guaranteed issue. They may cap out at $25-30k, but you can buy as many of those as you can afford. I've had people hand me a milk crate full of policies before and ask me to go through them all.

quote:

Originally posted by Rick Lee:

quote:

Originally posted by chellim1:
It depends…
I have a VUL or variable universal life policy.

In the biz we call those "surprise term." As long as you know how those work, then all good. Again, never met anyone with one of those who knew how they worked. You have to make higher payments as you age.

Oh, but I do understand how a VUL works. I'm "in the biz" too. I've used life insurance as a planning tool for a long time. My own policy, and my wife's policy have Issue Dates of 06/15/2001. So we've had them for almost 24 years. We were both in our early 30's then.

What I don't understand is your phrase "surprise term." There's nothing surprising about it. They've performed as expected. The premiums are flexible, meaning we put in whatever we want. The idea is to over-fund it when you are young. We control the investments, with over 50 sub-accounts to choose from, all with well known and respected managers.

When you are young, term insurance is cheap. It's a great value. If you only want to replace the loss of income for a specific term, that's the way to go. However, when that term runs out, it becomes difficult to replace. As we grow older, the likelihood of death continues to increase. So naturally insurance costs are based on mortality. If the first term expires, and you want a $2 million 20 year term policy on a 60 year old with a few health conditions it's going to cost a pretty penny. That's why most term policies expire without paying a death benefit.

If income replacement is your only goal, then buy term to cover the working years. However, life insurance is also a useful estate planning tool. Life insurance proceeds are non-taxable when passed on to the beneficiaries. Annuities can be a useful tax-deferred investment and can provide income, but they are terrible to leave behind. You will lose a third to taxes.

At any rate, every situation will be a little different. There are so many products and options because there's no "one size fits all" solution. "Buy term and invest the difference" all depends on how the difference is actually invested and whether you will have an insurance need (or desire) when the the term expires.

^^^ I'm glad to read that.

Unfortunately, it's very common for agents to pitch ULs to the final expense demographic (not a financially savvy lot), only mentioning the minimum payment and then all kinds of crazy stuff like it will pay for their grandkids' college and such. Every single UL I've run into in the wild, the policyholder had no idea how it worked, had never paid a dime more than the minimum and the face amount had dropped significantly. Plenty of them swore up and down they had WL, when the first page clearly stated "flexible" or "adjustable premium."

Yes!

We had Universal Life policies iirc, rather than whole life. There are some technical differences but imho the problems remain.

First of all your rate of return is better if you buy term and invest the remainder in a decent diversified portfolio.

Second, you don't need life insurance forever. You need it to fill the money gap for those who depend on your income. Once the kids are out of high school (or perhaps out of college), you probably don't need life insurance. Your surviving spouse may need some but not as much as when the kids were home.

Third, if you decide to cash out the whole life later on, the penalties are huge. You will only get maybe half of what you thought. Fees and taxes eat up that cash value!

The whole life products offer a few possible benefits.

A) After a number of years you can use the cash value to pay for the life insurance. If you have a special needs child, you can assure that the insurance will be in place to fund their Special Needs Trust when you die. Otherwise, you might not be able to afford to keep term insurance when you become elderly with health problems, and your child's future care might be in jeopardy.

B) Few young people are disciplined in saving. The whole life forces it. But you could do a payroll deduction or monthly auto-transfer to an investment account instead of whole life, and come out better. Yet, most people don't do that.

What are the different types of permanent life insurance policies?

Whole or ordinary life

This is the most common type of permanent insurance policy. It offers a death benefit along with a savings account. If you pick this type of life insurance policy, you are agreeing to pay a certain amount in premiums on a regular basis for a specific death benefit. The savings element would grow based on dividends the company pays to you.

Universal or adjustable life

This type of policy offers you more flexibility than whole life insurance. You may be able to increase the death benefit, if you pass a medical examination. The savings vehicle (called a cash value account) generally earns a money market rate of interest. After money has accumulated in your account, you will also have the option of altering your premium payments – providing there is enough money in your account to cover the costs. This can be a useful feature if your economic situation has suddenly changed. However, you would need to keep in mind that if you stop or reduce your premiums and the saving accumulation gets used up, the policy might lapse and your life insurance coverage will end. You should check with your agent before deciding not to make premium payments for extended periods because you might not have enough cash value to pay the monthly charges to prevent a policy lapse.

Variable life

This policy combines death protection with a savings account that you can invest in stocks, bonds and money market mutual funds. The value of your policy may grow more quickly, but you also have more risk. If your investments do not perform well, your cash value and death benefit may decrease. Some policies, however, guarantee that your death benefit will not fall below a minimum level.

Variable-universal life

If you purchase this type of policy, you get the features of variable and universal life policies. You have the investment risks and rewards characteristic of variable life insurance, coupled with the ability to adjust your premiums and death benefit that is characteristic of universal life insurance.

https://www.iii.org/article/wh...e-insurance-policies

Another thing to think about, is a 20 pay whole life insurance policy for your child. You pay premiums for 20 years, after that it's paid in full and your child has a whole life policy for the rest of their life.