What is term life insurance?

It's life insurance that's issued for a specific term. In other words, it's not open-ended, where you just renew it by continuing to pay the premiums. The danger with term life insurance, then, is that the policy might expire before you do.

My understanding is that term life insurance is a better deal than the alternatives (where you are locked in for life).

You pay the premiums... and your death (while the policy is active) will make someone a little richer. I have term life right now to make sure my kids will make it through college. I figure once they are gone... I will probably lower the amount quite a bit.

In those circumstances, term life is a good idea. If your beneficiaries only need your life insured for a certain period of time, then term life is the way to go. On the other hand, if you want a policy that is also an investment vehicle, then term life is a terrible option -- whole or universal life would be far better.

Yes - term life is the cheapest form of life insurance. And you are using it for exactly what is made for. For a specific length of time - another good purposes is in the case where you have a mortgage - you would want the life insurance to cover the cost of the mortgage in case you died and your beneficary would not be able to pay the mortgage themself.

Joe,

I have had a couple of financial advisors (whom I trust) say that life insurance is not a good investment vehicle. Here is the reasoning...

If you want life insurance, then buy life insurance-- life insurance is pretty straightforward, you figure out the term policy you want and then go to different companies to get the cheapest rate (from a reputable company of course) you can possibly get.

If you want to invest money; figure out your investment goals, and then choose investment vehicles that meet your goals with an acceptable level of risk.

Tying these two together will necessarily limit your investment choices while increasing the price of life insurance.

If you want to do both (probably a good thin); buy a term life policy and investment instruments separately.

Tying together to unrelated financial products is a gimmick, there is benefit to the company (i.e. increased sales) with no corresponding benefit to you as the consumer. The main goal is to make a product where the true cost/benefit can be mixed together and muddled (to the brokers benefit).

I think that you can almost always get a better (and simpler) deal by negotiating these two things separately.

Mortgage companies often offer a bad form of term life to their mortgage holders. For a small fee, they will pay off the mortgage in case of death. Often this is more expensive than just buying a term policy and coverage decreases over time since you are paying down your loan.

I agree with you. You buy an investment vehicle to invest in - you buy life insurance to protect those upon your death. That being said - I did end up buying a Variable Life Insurance Policy upon a financial planners advice - but he just wanted to make money off of me. But I am wiser now!

The only benefit of life insurance vehicles as an investment is the tax deferral part of it.

Yep - we didn't buy the crap from the mortgage company, my husband got it from our insurance broker.

Whole life and universal life cost more in premiums.

If you are disciplined, buying term life and investing the savings in premium payments vs whole or universal will leave you with more money than just buying the more expensive insurance.

Well, it's kinda' like the difference between renting and buying. There are advantages and disadvantages to both. Some people are better off buying, some are better off renting. Same with life insurance. Some people are better off getting term life, some are better off getting whole life. That's why insurance companies offer both products.

yeah but who the heck is discplined??

That is not a valid argument.

This implies that insurance companies would never offer a product that isn't good for consumers.

Of course this isn't the case. Insurance companies are interested only in what is best for them (i.e. what sells), Whether the products are actually beneficial to consumers is irrelevant (as far as their decision to offer them).

There are plenty of products that are sold that don't offer any real benefit to customers (over much cheaper alternatives). These include cigarettes, rust coating from car dealers, debt reduction schemes to name a few.

Just because a product is sold doesn't mean that it is worthwhile.

You misunderstand. I'm not suggesting that insurance companies wouldn't offer a product that isn't good for consumers, I'm suggesting the insurance companies wouldn't offer a product for which there was no demand.

People don't buy term life or whole life policies just because they're being offered by insurers, they buy those policies because there are good reasons to buy those policies. The demand would be there whether or not the policies were being marketed. If term life wasn't available, someone would invent it -- and ditto for whole life.

I still disagree. People buy things that don't benefit them (or that they could get the same thing for much less money) because people are irrational. There is a market for technical analysis of stocks (which research shows is useless). There is a market for magnetic bracelets (which research shows doesn't help you health at all) and herbal tonics (that actually damage peoples health).

The question is whether purchasing these insurance products is rational for anyone.

I am just raising the question. The fact that companies are selling them and customers are buying them doesn't mean that they provide any benefit to consumers.

I don't know if you're just being unusually argumentative or if you're being unusually dense, so let me try to explain in a way that will end the argument and cut through the density.

I'm not saying that something is beneficial either because a seller is willing to sell it or a buyer is willing to buy it. I'm not sure why you jumped to that absurd conclusion. Of course people buy things that are absolutely worthless, and I never said otherwise.

You want to know if I think it's rational to buy life insurance, but I already said that there are good reasons to buy those policies. My position, therefore, is pretty clear on that point. I don't know how you missed it.

Now, if you want to argue specifically that it is irrational to buy life insurance, go ahead and make that argument. I'd be interested in hearing it. But stop trying to make my arguments for me -- you're doing a real half-assed job of it.

I didn't attack you personally, and I certainly didn't mean to imply you were dense.

I am arguing specifically that I suspect (and yes I am intentionly tempering my position) that it is irrational to buy anything but term life insurance. I gave very clear reasons for this suspicion...

1. By being locked into an investment tied to a commitment to life insurance. you restrict your investment options (a bad thing) and you lose flexibility to change insurance as life changes (also a bad thing) in addition to the higher cost.

2. By negotiating investments and insurance separately, you can get the best deal on each separately.

3. Negotiating these two financial needs together means the product is far more complex which means the company has an advantage in the negotiation.

You gave two reasons for why buying whole life insurance might be a good deal.

1. Companies are selling them as a product.
2. Customers are buying these products.

I was simply responding directly to your line of reasoning by pointing out there are plenty of products that are being bought and sold that are irrational.

If you felt this was a personal attack. I apologize.

You're wrong. I never gave any reasons in favor of buying whole life insurance. I didn't know that I had to. But if you want to know a few of those reasons, they are:

1. Whole life premiums may be more expensive at the outset, but they usually remain constant for the duration, which means that they become relatively less expensive as time goes on. That's one reason why whole life is a good policy for young insurance buyers. By locking in a premium rate early in their lives, while the actuarial statistics are on their side, they can avoid paying much higher rates later on. Also, it's less likely you'll have a disqualifying medical condition when you're young.

2. Whole life policies build a cash value. Dividends can be used to increase the death benefit or to decrease premiums. In addition, it's possible for the policyholder to borrow against that cash value or even cash in the policy, something that can't be done with the average term policy. And if you decide you'd rather have the money than your beneficiaries, you can turn it into an annuity -- again, not something you could do with a term life policy.

3. As long as you pay your premiums, your policy can't be cancelled. In contrast, term life policies have a set term, which means they can expire before you do. If your intention is to leave something to your beneficiaries, then you don't want to have a life insurance policy that might not be there when it's needed the most.

Now, to address your arguments:


The highest cost policy is probably the one that you buy when you're past 50, which is when a lot of people buy term life. That is, if you can get any insurance at that age. As for locking yourself into a long-term commitment, you do that with a mortgage too, but that doesn't seem to deter a lot of people from buying homes. As for flexibility, I don't get your point: if you don't want your whole life policy any more, you cancel it. If term life looks like a better option, you buy that instead.


I see no reason to believe this. But, in any event, you're comparing apples and oranges. Nobody says "I can either buy a whole life policy or else buy a term policy plus these municipal bonds." Nobody buys whole life insurance primarily as an investment vehicle. If they did they're missing the point.


That doesn't make any sense. A whole life policy isn't much more complex than a term life policy. The fact that it has an investment feature doesn't have any bearing on the insurance aspect (except for the possible increase in the death benefit), which should always be the primary reason for buying whole life in the first place.

Now, that's not to say that there aren't good reasons to buy term life. As I said before, it's like the difference between renting and buying a home. Some people should rent, some people should buy. One is not always better than the other.

(I should mention that there is great variation among different types of life insurance policies, so I'm necessarily speaking in broad generalities here. Your mileage may vary).

Now we are getting somewhere... and thank you for expanding your arguments.

My thesis is that, due to how economics works, buying term life and intelligently investing the money you save, will almost always mean you have more money (for the same insurance coverage) in the long run.

This is why many financial professionals look at whole life policies as a bad deal in general.

This means that buying term life insurance will almost always be a more rational choice-- meaning it will provide equal or better lifetime coverage at a lower cost (and higher investment potential).

You are completely correct on two points in favor of whole life insurance. They do build a cash value, and they do lock in premiums.

But the alternative (when you buy term life instead) means the extra money will be invested. The fact that this is cash means that you have flexibility to pick a wise investment strategy (you aren't locked into any company or vehicle) and you can get the vest deal carefully designing for how much risk/return you want.

You claimed that nobody says "I can either buy a whole life policy or else buy a term policy plus these municipal bonds."

This is incorrect. That is exactly the choice that any smart consumer should consider before entering a long term financial commitment. (Of course you wouldn't have to just pick municipal bonds, you would be free to choose any number of wise investments portfolios.)

Of course, a wise consumer could look at specific whole life and term life deals and do the math herself.

My claim is that when you look mathematically and rationally at these two options, term life and wise investment will almost always be a better deal.

That all depends on when you plan on dying.

Let's construct an example so we're not dealing with vague generalities. Suppose Will and Tim are identical twins who buy life insurance policies on their 25th birthday.

Will buys a whole life policy with a $100,000 death benefit and a $100/month premium that will not increase. Due to paid-up additions, the death benefit will increase by 1% per year compounded (a very conservative assumption, but I'm giving all the benefits of the doubt to term insurance here).

Tim buys a term life policy that expires in ten years. The policy also has a $100,000 death benefit but the premiums are only $20/month. At the end of the ten-year period, Tim buys another ten-year term policy, but the premiums go up by $20/month every time he buys a new policy because he is a worse actuarial risk every time he renews.

Both Will and Tim keep paying on their policies until they reach the age of 75. Tim also invests the difference between the premiums he pays and the premiums that Will pays. On their 75th birthday, both Will and Tim are killed in a vicious attack by a rabid wombat. Whose beneficiaries are better off?

At the end of 50 years, Will has paid $60,000 in premiums, whereas Tim has paid a paltry $36,000 -- a difference of $24,000. Tim, of course, has diligently invested that $24,000, so his heirs get that amount plus any increase. Will's heirs get around $162,834 in death benefits, which is $62,834 more than Tim's heirs get from his policy. In order for Tim's beneficiaries to do better than Will's, Tim has to invest his $24,000 so that it ends up being larger than $62,834. Is that possible?

Well, sure it's possible. Indeed, it may not be very hard at all, so long as Tim always invests this money, never withdraws any of it, and doesn't get caught in some stock market crash or other financial disaster along the way. And if Tim is that kind of guy, then he is better off sticking with term life. But suppose he isn't. Suppose he's not the kind of guy who can be trusted to diligently save his money every month and keep it socked away in a grade-A investment over the span of 50 years. Then it's clear that he would have done better to follow Will's strategy, since the whole life policy, in effect, forces the policyholder to save every month.

Of course, if Will and Tim live past 75, then the math starts looking worse and worse for Tim, since his premiums start costing more than Will's for the same amount of coverage -- that is, if he can get coverage at all. On the other hand, if Tim dies when he's in his thirties, he comes off looking like a genius*, since at that point he is still paying very low premiums on his term policy.

*Depending, that is, on how he dies. Nobody looks like a genius if they die, for instance, in an accident involving a cheese grater.


It all depends.