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Scott Burns

Whole life insurance, or term? The answer depends on your financial needs

By Scott Burns
April 21, 2010

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Q. I posed a question to four of my 50-year-old hunting companions on whole life versus term life. They said to buy term. My question comes after a financial plan review with a large service-oriented insurance company. Their process is supposed to separate the financial planning aspect from the sales motive. But now I’m not so sure.

We are 50 and 46, with two kids, 14 and 8. Our net worth is about $2 million. We max out our 401(k) and contribute to a 529. We both have professional jobs. Our financial planner recommended whole life policies in the amount of $250,000 for each of us. I only minimally participate in my company life insurance. My wife is provided twice her salary in life insurance. She also has a $500,000 term policy.

It is not clear why I would want whole life over term life. A term policy is about $80 a month for 25 years. The cash value policy is $250 a month. Can you help me understand why I should, or should not, choose a whole life policy?

A. Whole life has a savings component and builds cash value. The earnings on that cash value are used to pay part of the rising cost of insuring your life as you age.

That’s the only way the premiums you pay can be held constant because your risk of dying increases with age.

Whole life policies are good for people who have commitments and obligations that won’t go away. They are also useful for people who need to bankroll the payment of a future estate tax against illiquid assets, such as a family-owned business.

Term life policies are a better choice for most people because most of our long-term commitments are fulfilled before retirement. In due course, the kids are educated, the mortgage is paid off, and your retirement savings will provide enough income so that you don’t have to work anymore. When that happens, you don’t need life insurance because your earning power no longer needs to be replaced.

The vast majority of households have no need to plan for estate taxes because their estates won’t be large enough to be taxed.

Your best course is to measure the resources your family will need in the event of your death, and then insure for that. Not more, not less. If your financial planner hasn’t done that, you need another financial planner.

Q. Do you really think a 50 to 75 percent stock exposure is a good idea in light of recent stock market problems? I’m retired. It would be nice to have more income, but I also like to sleep at night.

A. You’re the one to set your risk tolerance, so you need to set your portfolio where you can sleep at night. The 50 to 75 percent equities commitment is based on portfolio survival studies, not sleep studies. At 50 to 75 percent, your portfolio is likely to deliver a reasonable inflation-adjusted annual withdrawal without exhausting the portfolio before you die. Knowing you have a better shot at not running out of money should let you sleep a bit better.

Scott Burns is a syndicated columnist. He can be reached at scott@scottburns.com.