That was the title of a pretty good article by Philip Van Doorn last week over at MarketWatch. I say “pretty good” because he makes the mistake that most journalists make by stating that whole life “combines investing with term life coverage, and is therefore more expensive.”
That is just a flat-out false statement. The reason the whole life premium is (substantially) higher than the term premium because the insurance company must reserve for the eventual death claim. Term insurance is designed to end before life expectancy, so there will be few claims (industry statistics show that less than two percent of term policies result in claims) and hence a much smaller reserve is required.
That egregious mistake notwithstanding, he does make two excellent points. The first is that most people need more life insurance. Of the people that have life insurance, the average amount of coverage they have will last their survivors about three years.
Now if you received a bonus of three years income, that would be pretty sweet. However, if it came with the provision that not only would you lose your job but you would never be able to work again, well, panic just may set in.
The second good point he makes is that term insurance is probably much cheaper than you think. A 35 year-old male in the best underwriting class will pay less than $450/year for a $1,000,000 policy that has a guaranteed level premium for 20 years.
The problem is that by the companies’ own admission, usually less than 15% of applicants qualify for the best class. The second best class carries an annual premium of just under $600, and almost half of the applicants qualify for this class. The third best is about $750, and the fourth best, standard, has an annual premium of just less than $950.
While $1,000,000 may seem like a lot, the point really is how much income will that lump-sum generate? Even a five percent return, which isn’t a slam dunk in today’s interest rate environment, will only generate $50,000/year without invading principle. Does that seem sufficient for someone earning $100,000/year?
So it’s good to know that I’m not the only one beating the life insurance drum, that at least one somewhat visible columnist has also sounded the clarion. I welcome all the help I can get, even from those who, while not ignorant, don’t fully understand a whole life contract.