This is a guest post from Mindy Lamont, the Founder & CEO at The Insurist and participant in Bloggers Helping Bloggers. As a former sheepherder, she finds life insurance and financial planning just a bit more exciting.

Term vs. Whole Life insurance.

I sigh just typing those words. Several times.

People get all sorts of riled up on this topic. Cue the likes of Suze Orman and Dave Ramsey. It’s like the Vegan argument. Full of passion, idealism, emotion, and half truths. And no, I’m not calling Vegans liars. My diet comes close, without all the emotion. Same with my views on term vs. whole life.

I believe they’re both good. Depends on the client. Put into the wrong hands, a whole life policy can be like kryptonite for your finances. In the right hands, and much later down the road, a well designed whole life policy can be a diamond in the rough, just waiting to be harvested. This is where the confusion lies. The pundits like to portray this as an apples to apples comparison. It’s not. At all.

Let’s start with defining term coverage. Term is the most basic form of life insurance. At the time of underwriting your risk profile determines your premium. That premium is guaranteed for a certain number of years. 1, 5, 10, 15, 20, etc…usually in five year increments. At the end of the initial term, the premiums typically skyrocket. Why? Because term life insurance isn’t designed to go on forever.

Often times this increase in premium is described as a scam or another example of the insurance industry trying to take your money. It’s really not. It’s just that these products are not intended to go beyond their initial term. That is all. You might think someone who was uninsurable at the end of a term policy might have to continue and pay these enormous premiums. Likely not. Why? Because of something called a conversion privilege…one of the most important concepts when it comes to buying term like insurance.

What’s a conversion privilege you ask? The majority of term policies provide the ability to convert to another, usually permanent, product with no additional evidence of insurance. Huge, right? That means if during the duration of your term policy you decide you want life insurance for life you can get the same amount of coverage in a permanent product guaranteed. The devil’s in the fine print though, because some policies limit the number of years you can take advantage of this, so make sure you know what you’re getting into.

So the summary on term life: simple, affordable coverage that is intended to cover a temporary risk for a defined number of years.

Whole life isn’t so easy to explain. This is often part of the problem. Hard to explain and harder to understand if you’re not eating, drinking, and breathing life insurance every day. This is what leads to the product being SOLD instead of understood.

Whole life is best used as a savings product, not strictly for death benefit protection. And it’s a LONG TERM savings product when used this way. While there are many different uses for whole life products, I’m going to stick to its application as a safe money savings tool.

Treating it as an apples to apples comparison with term life products, the premium numbers immediately point out we’ve got big differences. For the healthiest 35 year old man, a $1 million 20 year term policy will run something in the neighborhood of $40 per month for 20 years. For the same guy, a $1 million dollar whole life policy will cost $820 per month through age 65. Say what?!? No that’s not a typo. $40 a month vs. $820 a month. Who in their right mind would pay $820 for something they can get for $40?

No one. Because it’s not the same policy.

The difference in this example is what happens INSIDE the policy and what you can do with it. Some call it a “living” benefit. If we look at the whole life policy at the end of twenty years (when the term policy expires), the whole life policy has a minimum guaranteed cash value of $231,360, where as the term policy has no cash value built up. If the client pays premium to age 65 and uses the cash value to supplement his retirement income, he has the potential of adding over $27,000 to his annual income from age 65 to 95. So for a total of $196,900 paid over 30 years, the client can potentially draw $834,600 (over the next 30 years) out of the policy on a tax free basis. Yep, you read that correctly. On a tax free basis.

The next argument against whole life typically comes in the form of “buy term and invest the difference.” Often times they’re right, particularly when the client doesn’t have 30 years to let their money accumulate. But rather than lose your attention completely, I’ll stop here and take a break. In a follow up post we’ll tackle that one, with numerical examples so you can see where this does and doesn’t make sense.

One thing to point out is while we are using the same theoretical client for this example, in real life, the two product examples I’ve used would be applied to two completely different clients. One with a need for basic life insurance protection (i.e. the term product) and one with a decent amount of discretionary cash available to contribute to a long term savings plan. The need for term insurance can be easily identified and solved. The suitability of a whole life policy should only be determined after a thorough discovery process. If someone’s trying to shove it down your throat, run fast.

Thanks for listening. I’m happy to take any questions, and I’ll be back with more on this topic in a future post (Jana’s note: and she will be. Soon. Because although I grew up in a house with an insurance broker for a father, I don’t understand this stuff at all. And it’s important).

**Please note: there are all sorts of disclosures about theoretical explanations of insurance products. Things like “this example is only for a 35 year old healthy male in California who’s never been skydiving, didn’t party like a rockstar, and doesn’t play with tigers.” You get the picture. The figures here are for explanation purposes only and represent no guarantees related to any specific person reading this. Play nice kids.

 

 

This is a guest post from my friends and new bloggers Jack and Diane at Marriage in Debt who’ve decided it is time to get out of debt.  And what better way to do it other than in the public?!  Zany adventures are promised as they first work to get rid of over $78,000 of “traditional” debt (not including student loans or houses – those numbers are coming later).  No gimmicks, no schemes, no inheritance, no lottery winnings here.  Just plain hard work as a computer programmer and professional fundraiser figure this all out.  

She Said:

It was a crisp day on the street lined with homes filled with dozens of occupants attending the local university.  Inside this one specific tall white beat-down house with the lopsided porch lived five guys.  Nope, they didn’t start the hamburger chain (Jana’s note: though wouldn’t it be awesome if they did? Free fries for life!).  They were all brilliant in school and studying engineering, accounting, geology, education, and mathematics (combined GPA of about 18.6).  On this particular day, while also trying various methods to cure the hangover, they were gathered around the doorway to the laundry room.  Quite simply, chicks don’t dig wet clothes and they were all too broke to call a professional.  The math major was up to his elbows in parts and wires until the guys who studied finances, rocks, and actual mechanical engineering were satisfied the dryer was finally fixed.  Confidentially the math major began to plug the new cord into the wall and then attempted to bolt it to the dryer.  All stared in disbelief as a blazing bright blue arc of 220 volts shot from one of his hands to the other.  There were no permanent damage (we think).  It should also be noted that the washer had recently leaked and the math major was standing in this puddle of water.  The engineer simply quipped, “cool!”

Ladies and gentleman, my confession at the moment is that I actually married the math major. (Jana’s note: I married someone who tried to do pyrotechnics with grain alcohol. I think Diane and I should get together and compare notes on what the hell we were thinking.)

The dryer incident was not the last of the near-death handyman incidents.  I may have forgiven the great ceiling-fan-wire-melting-during-the-heat-wave-with-a-newborn-baby incident but certainly have not forgotten (obviously)!  There has also been successful stories involving car alternators, oven doors, lawnmowers, and, of course, anything computer related.

My preference is to pick up the phone and call in an expert.  But Jack likes to tinker with it first.  Oddly enough, when the decision came to either hire a professional or attempt to fix on our own, the final verdict is almost always centered on the green paper bills.

He Said:

Yep, it’s no secret that I refuse to call experts and, armed with whatever information I can pull off of the internet, I can fix ANYTHING!  Do I have the tools, skills, knowledge, or any business tackling 90% of these projects?  NO!

When looking at a project, you have to make the decision between DIY or hire the professionals.  That has nothing to do with pride nor ego nor being-a-man bravado.  This is about getting the job right that costs as little as possible.

1. Research!   The internet is a wonderful thing and can be used for more than just porn and fantasy football leagues.  Surprised, right?  Yeah, me too.  Most vehicles have specific community boards where you can ask any question or search for any solution.  Most appliances have self-help boards that include step-by-step instructions with pictures.  Just put “How to..” into Google or Bing or Ask, and watch the knowledge come pouring onto your screen
2. Take a quick stop at YouTube.  Our Jeep lost all power to the driver’s side door.  I kid you not, there was a video of a guy demonstrating how to find the broken wire and solder it back together on the same exact model with the same interior and exterior colors.  It was uncanny that I peeked out the window.  I have used YouTube to help install heating elements in dryers, patch sheetrock, and setup a garage door opener.  It is amazing what is out there, and what people have recorded themselves fixing over the years.  Be aware that they always make it seem easier on the screen than it is in real life.
3. Consider your tools.  If there is a mistake I always make, it’s that I do not have the right tools.  I think I can get by with the tools I have rather than ponying up the dough for the right ones.  And, each time, I end up doing more damage or spending three times as long finishing the project.  Time is worth money too.  Consider the investment in the right tools for this job that you will need to purchase.
4. Duct tape and WD-40 work well in a pinch.  When the back spoiler of our Trailblazer fell off on a family vacation, the always versatile duct tape held everything together until we got back home.  And, when it turned out to be a $700 repair job, it held for a couple of months while we saved up the money.  Our neighbors were super impressed with that car sitting in our driveway, but we paid $700 for the repair, not $700 plus 18% interest on a credit card.
5.  Utilize social media.  We all have friends that have done these types of things before and can offer you some guidance.  When our air conditioner unit fan stopped turning, we posted the problem on Facebook.  Ten suggestions later telling us to “kick it” and ..that actually did work.   So ignore all male impulses to NOT ASK and realize the end-goal is to get the project done right
6. If you have friends or family that does this type of work professionally, utilize them.  The best thing you can do is bribe them with some beer, have them show you how to do it, use their tools, and hopefully you can get the project down for the cost of parts only.  And, the project is done right the first time.
7. If after all of these options above you decide to call an expert, rely upon the above tools to find an expert to trust.  A blind call from the yellow pages rarely worked out for us as that is how we found anti-politics guy, still-in-refrigeration-school guy, make-yourself-at-home guy, and sleeping-under-outdoor-running-spigot guy, and the I-swear-your-dog-did-it guy.

My attempts at DIY projects over the years has lead to some very interesting and entertaining stories among friends, especially the near-death ones involved large volts of electricity.  But, I have learned a ton, become more confident along the way, and, more importantly, learned my limitations on what I can and cannot tackle.

Some of my buddies can tear down a car engine blindfolded or finish an entire basement with a single hammer.  Other guys hire someone to paint a room or change a light bulb. If you are one that just jumps in feet first, do the research first to see if you are going to be over your head.  Basically, put the porn down and do a little research.  You may save yourself some big bucks with a little DIY knowledge.

Jana’s final thoughts: DIY is not for the faint of heart. It’s tough, it’s complicated and, if you don’t know what you’re doing, it can wind up costing you a ton of money in the end. Before giving DIY a try, follow Jack’s handy tips (see what I did there? Botched SNL reference. Yeah, I know. I’m hilarious) and determine if you really can pull off a DIY project or if you need to call a professional.