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The Argument: Better for Your Family- Whole Life or Term Life?

The Argument: Better for Your Family- Whole Life or Term Life?

| October 01, 2020

This is a topic that can be very divisive. In April, an article was published in this magazine stating that purchasing whole life insurance is a poor decision, and that those who sell it, are either incompetent or greedy. I was motivated to write this article as a response. I have been in the financial services industry for over 25 years and have both whole life insurance and term insurance policies that have paid out millions of dollars to beneficiaries.

I recently delivered a life insurance claim check for over $2.5 million to the widow of a client in New York who died recently. She didn’t ask what form of life insurance her husband had purchased. She was grateful to receive these funds that would replace the income he provided the family. The primary purpose of life insurance, for most people, is to provide them stability and financial protection if the family should experience an unexpected loss of income due to the death of a family member.

Whole life has a higher initial premium than term insurance, however, the insurance company may pay a non-guaranteed dividend into a whole life policy that can lower future premiums. Additionally, dividends help build a policy cash value along with increasing the death benefit each year to keep up with inflation, unlike term insurance which has a level death benefit. The whole life cash value is fairly small in the early years of a policy, but those who hang onto a policy for a long time get rewarded by the tax deferred compounded growth of the cash value.1 This cash value can be borrowed against, used for emergency situations, or taken as supplemental income in later years.2

If you only need life insurance for ten years or less, term insurance is your best option. Too often, people compare whole life insurance cash value’s rates of return to the stock market. This comparison cannot be made as whole life insurance is uncorrelated to the stock market. Whole life is guaranteed to increase in value every year, no matter how the markets perform, and no tax is paid annually on the policy growth. Every time tax rates increase, a whole life policy becomes more valuable.3

If you owned a whole life policy over the last 30 years, your cash value rate of return potentially would have been 4% to 5%.I have many people in their 50s and 60s tell me they wish they would have purchased more whole life insurance while they were young and healthier. Of course, term is less expensive and I would rather see a young family get a larger term policy than a smaller whole life policy.

Life insurance can also be beneficial in retirement. The promise of the death benefit provides a permission slip to spend down other assets along with one’s nest egg in retirement. If the death benefit is no longer as important, a whole life policy owner can take tax-favored withdrawals from the policy as supplemental retirement income. When you pass away, an income tax-free death benefit is paid to your beneficiaries. It is important to note that a whole life policy guarantees your loved ones will receive a death benefit, whereas many term policies lapse or expire before paying claim.

I believe both whole life insurance and term insurance have their place because each person’s financial situation is unique. Do your own research and work with an experienced professional who can help you evaluate what is right for you. But remember, the best type of life insurance policy is the one that is in force when the one’s you love need it.

Howard Suss is a Registered Representative of Park Avenue Securities LLC (PAS), 55 W. Monroe, STE 3490, Chicago, IL 60603  securities  products and services offered through PAS, securities offered through PAS, 888-600-4667. Financial Representative, The Guardian Life Insurance Company of America (Guardian), New York, NY. PAS is a  wholly owned subsidiary of Guardian. The Suss Financial Group is not an affiliate or subsidiary of PAS or Guardian. PAS is a member FINRA, SIPC. 2020-106959  Exp 08/22

* Dividends are not guaranteed. They are declared annually by Guardian’s Board of Directors.

1. Some whole life polices do not have cash values in the first two years of the policy and don’t pay a dividend until the policy’s third year. Talk to your financial representative and refer to your individual whole life policy illustration for more information.
2. Policy benefits are reduced by any outstanding loan or loan interest and/or withdrawals. Dividends, if any, are affected by policy loans and loan interest. Withdrawals above the cost basis may result in taxable ordinary income. If the policy lapses, or is surrendered, any outstanding loans considered gain in the policy may be subject to ordinary income taxes. If the policy is a Modified Endowment Contract (MEC), loans are treated like withdrawals, but as gain first, subject to ordinary income taxes. If the policy owner is under 59 ½, any taxable withdrawal may also be subject to a 10% federal tax penalty.
3. Guardian, its subsidiaries, agents and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation.