term vs whole life insurance

The truth about Whole Life vs Term Insurance

term vs whole lifeLet me start this article by saying that I am an insurance agent, but I will tell you things here about Whole life insurance, that may cause a lot of my insurance agent friends to hate me, but I don’t care, because the truth needs to be told.

I will also admit here that I have sold whole life policies in the past, but it was in rare occasions, where either the client insisted on it, or the person was too old to buy term insurance and there was no other choices.

There is also some very interesting investment concepts, where we use participating, “dividend paying” whole life insurance, or Universal Life insurance, but not for insurance purposes, but rather to grow and accumulate savings on a tax deferred basis, and that is a different concept altogether, and can be applied, but  only if you have adequate life coverage first.

Some people use such a strategy instead of TFSA or RRSP investing, because the returns are more predictable, and you have guarantees to never loose your money. It is also more tax efficient, ie you pay less tax in retirement.

In this article I would like to give you some facts that should convince you beyond any shadow of doubt which product is better for YOU… is it term life insurance or is it Whole Life Insurance?  But let me start with this fact:

Why Is Whole Life Sold twice as often in Canada as Term Insurance?

The reason more Whole life policies are sold in Canada than term insurance is two-fold

  1. Life Insurance companies love Whole life insurance policies. There are many reasons for this, but the main reason why insurers prefer to sell Whole life is profitability. Whole life brings in more premium money and profits than term insurance, mainly because it is close to 10 times more expensive than term insurance. Whole life insurance also lasts longer, which lines insurance company coffers even more. One other reason Insurance companies love WL is because they don’t have to report many of the fees, penalties and returns. It is very difficult for you as a consumer to fully understand what you are getting into, and what your returns may be. Lack of transparency really is a big problem.
  2. Life Insurance Agents love Whole life insurance policies too. This is a little embarrassing for me to admit, since I am an insurance agent myself, but it is the truth…. Whole Life insurance pays larger commissions than term insurance, or many other insurance products. Couple that with the fact that premiums are much higher as well, and it becomes a no-brainer for many insurance agents. If an agent can make 10 times more commissions per client by selling them Whole life, it is very tempting for them to convince themselves (and convince you as well) that is the way to go. The sad part is that if you ask most agents what kind of policy they own themselves, or what sort of policy they sell to their best friend or family members, you would be surprised.

What do other experts say about Whole life insurance?

“For the overwhelming majority of consumers, cash-value policies cost too much and they often deliver both too little protection and an inadequate return on your investment.”
– Consumers Reports, July 1998

“… Consumers lose billions of dollars a year by buying the wrong cash-value life insurance policy…”
– Money World, December 1997

“For most people, term life policies, which pay only a death benefit, make more sense than cash-value whole life policies, which accumulate a cash reserve.”
– Worth, February 1998

” Term, the simplest kind of life insurance – is deservedly popular among parents because it offers the most coverage at the lowest cost.”
– Smart Money, December 1997

” Consumer Reports has long recommended term insurance as the sensible choice for most insurance buyers.”
– Consumer Reports, July 1998

” I don’t think that most agents know they are screwing their friends and relatives by selling them whole life.”
– Michael Lynch, Federal Trade Commission

” Many families with cash value whole life policies are tragically under insured… Had they bought low-premium term insurance, they would have 10x the money, but agents earn bigger commissions by selling cash value, so they often push it, even if it leaves the family short.”
– Newsweek

“Agents make 5 to 10 times as much selling Whole life insurance policies as they do selling term insurance policies for the same amounts, yet no disclosure of this fact is made to consumers. Policies are not sold on the basis of consumer need, but on the basis of industry greed.”
– Ralph Nader, National Insurance Consumer Organization

” term insurance is by far and away the best deal… No matter what your agent tells you, it’s almost impossible to come out ahead with cash value whole life insurance.”
– Retire Rich, David Evan Morse

” Term is the no frills model of the life insurance industry. It is relatively inexpensive, easy to understand, and in general, the best value for the premium dollar. However, there is a good chance your agent will not discuss term insurance as an option for your family unless you bring it up.”
– Buyer’s guide to life insurance

” Existing cash value whole life policies, almost in every case, should be replaced.”
– The Canadian Buyer’s guid to life insurance

” For the average policy, the consumer could even put the money into a mattress and come out better off.”
– The Consumer federation of America

” It doesn’t matter how much the cash value on your whole life policy increases – the company is going to use it when you die, anyway.”
– Norman F. Dacey

“When you die, the insurance company steals your savings – the cash surrender value.”
– The Canadian buyer’s guide to life insurance

“Whole life is a plan in which your money goes into a “hole” never to be seen again. Your cash value is really the property of the insurance company and makes the insurance you are buying overpriced by up to 600%.”
– Charles J Givens

” Over 80% of Canadians have either whole life or universal life insurance policies. Most Canadians don’t know it, but whole life policies are from the Stone Age. Do you know why they call them whole life policies? Because all your money ends up in a hole.”
– Idiots guide to personal finance for Canadians

“Almost every Canadian who buys life insurance gets ripped off. Simple term insurance, without bells and whistles, is the cheapest, most effective insurance around.”
– William McLeod – Canadian buyer’s guide to life insurance

What is the biggest problem with permanent whole life insurance?

If you are still not convinced…. let me try to explain in very plain language. We’ll assume that you are interested in buying life insurance for protection reasons, in other words, you want to make sure that if you die prematurely, your beneficiaries will receive a certain amount of money (called death benefit or life insurance proceeds).

In my 26 years as a life insurance broker, I had the privilege to deliver quite a few death claim cheques to survivors. In all the year, I was never asked by the beneficiary “was this policy a whole life or term insurance?”. Most of the time, they are just very grateful that there is a life insurance benefit at all, and usually they are sorry that the cheque wasn’t bigger, but they never care what kind of policy it was.

So with that being said, the most important thing when it comes to life insurance is that the policy pays out when it is needed the most. So now the question is… when is that (when you need it the most)? In my opinion, that time is when you have the most liabilities (children, dependents, debts etc).

So let’s take an example of a younger couple in their 30s, with a few kids and a mortgage.

Let’s also assume that they have a budget of about $60 per month that they can easily afford for the premiums.

Well, for that $60 premium, they could buy 500,000 of 20 year term insurance each, which would be enough to pay off their mortgage and leave a little behind to take care of raising the kids.

That same $60/month would only buy them about 50,000 of Whole life insurance, so that is  10 time less coverage for the same premium.

If God forbid, one of the spouses pass away in those next 20 years, which policy do you think would do better for them… whole life or term? You would have to be an idiot to say Whole life. It would be criminal for any agent to sell the WL instead of term insurance, yet I see this happen quite often out there.

Now wait a minute, you say…. chances are pretty low that I would die in the next 20 years, since most people nowadays live to be 70 or 80. So what happens then, if my term runs out, and now I don’t have any insurance when I’m really old. Ok, let me play along… so you were lucky, and you didn’t die young, so you kept this 50,000 whole life policy for 45 years, and then you finally die at age 78 or so, and low and behold, your spouse gets the whopping pay-out of 50k.

Inflation kills most whole life proceeds

50k today could buy you a few things, pay for a funeral, last expenses, but how much will that be worth in today’s dollars 40 or 50 years from now? About the same as the $2000 policies that were sold back in the 1950s. You see, back then, $2k was a lot of money, you could buy a car, or even a house for that money. But today, that 2k wouldn’t do anything, not even pay for a cremation. So that is the big problem with whole life insurance, it just doesn’t do you any good, whether you live or die, it is a waste of your money.

A friend of mine has started a movement against these bad practices, so please do check out his website and join the revolution at http://www.insuranceblogbychris.com/whole-life-insurance-rebellion/

Conclusion

Look, if by now you still insist on some sort of permanent , Universal or whole life plan, then let’s at least have a conversation about it first. Let me show you the only kind of permanent policies that I do recommend. Policies, that are designed to have less insurance components, but have more investment and savings.

There is some investment policies, called indexed universal life with BMO Insurance, which can be tailored to your situation to maximize savings.

But most importantly, we need to make sure that you have adequate term insurance, and look at the whole picture, so please reach out to me and let’s start a conversation.