Is whole life insurance a good option for my family of three if I have multiple retirement accounts and insurance policies already in place?
I am a single mother of two young children and work as a nurse. I have a 401(k) account, a 403(b) account, universal life insurance through the company I work at, and term life insurance outside of my company. I make about $90,000 a year. Would adding whole life insurance be a good idea for my family and I?
1. With the investment and financial planning industry's relentess and almost propagandic effort to push every dollar into qualified retirement plans I find that most people are woefully underinsured. This goes for insurance that can have a huge impact on your family's financial future including life, disability, critical illness, and liability insurance. Insuring against these events protects your family's dignity in the event of death, cancer, heart disease or lawsuits. However, it looks like you have taken responsibility and have several life insurance programs in force. What are those amounts? Whole life insurance can be great tool for your family especially to cover your final expenses or for an inheritance. By purchasing it younger your coverage will be more affordable over your lifetime especially when your term life insurance expires or becomes annually renewable term with premium increases. It only costs more to insure you as you age.
2. As a single parent you should STRONGLY consider looking at some other insurances such as disability and critical illness. Since you are a one income household your family's financial future is in a much riskier position than a household with dual incomes. Really consider utilizing your dollars to both insure and save for your retirement.
Without knowing the account balances of your 401k & 403b, and the current life coverage you already have, I cannot begin to give you sage advice. But insurance is to insure a risk, it is NOT an investment vehicle and don't let anyone try to sell you on that idea. If you need more coverage, normally the best option especially if you are a saver and in relatively good health, BUY TERM AND INVEST THE DIFFERENCE!. You will be far better off in retirement if you "self-insure" over time. But if you do not save the difference by dollar cost averaging monthly like you would the whole life, then do the insurance. I have my insurance liscense and I don't sell it. Probably upset a few "advisors" today. You definitely need to make sure you have a will and a custodian & trustee for your kids if something happens to you.
Hope this helps and best of luck, Dan Stewart CFA®
All things being equal, I prefer to own term life instead of whole life if you don't have any estate planning needs. The vast majority of people are better suited to own a term life policy for their specific needs. For example, if you have kids that are 10 and 11 years old, and you're the only working parent, your income is essential to having them survive. If something happens to you, you would want them taken care of. That being said, how long do you want them taken care of. Maybe you want to replace your entire income for the next 10 years so they can finish college. A 10-year term policy will cost you much less than buying any permanent insurance policy.
The mistake people make is that they seem to want much more insurance than they need. I've seen people buy policies (or they were sold policies) that are way more than they should have in coverage. If you make $90,000 per year and want to make sure your kids maintain their standard of living for the next 10 years until they are adults, simple math says you should have about $900,000 of life insurance. Some people may add additional coverage to factor in inflation, but that's how the numbers work.
Some people say they want their kids' college paid for if they die. Well, if you stay alive, you will need to find the college money out of your current income, so why are you including college payments in your life insurance benefit? Like my father once told me, I want to make sure I'm not worth more dead than alive. Just something to think about before making a commitment that will cost you more than necessary.
It could be a good idea if you want to have a guaranteed portion of your financial portfolio. Whole life insurance gives just about the best guarantees out there. Of course, you have to understand how the policy works in terms of liquidity, taxation, and so on. But if it passes muster, I can't think of a better way to guarantee the growth of some of your money. So this is a discussion you need to have with your investment advisor.
Another concern would be the reliability of your life insurance coverage. What happens if you leave your current employer? Can you take that universal life policy with you? If not, then you will lose coverage. If so, do you have to medically qualify to keep it? What happens if you have medical issues and can't qualify for a new policy? This is a discussion you need to have with your insurance advisor.
So, it's not a question of what type of product, but of the benefits and features of the product and how they fit into your own personal preference and plans.
What objective are you trying to meet by considering a whole life insurance policy? If you need additional death benefit for your children, buy more term insurance. It's much cheaper and the dollars saved could be redirected to more productive areas (ex. investing, building savings, paying off debt (if any)). If your goal is to use a whole life insurance policy as a way to build wealth, I would recommend that you don't do it! The insurance component - which you don't need if you're already adequately insured - is expensive. Generally speaking, the investment options are limited and expensive. As your children age and you build wealth, you may not need to have life insurance in place for your entire life.
Instead, buy enough term insurance to take care of your children should something happen to you before they are independent. Depending on their ages, this may mean a 20-year fixed premium term policy. For investing, follow a few simple fundamentals: keep expenses and taxes low, diversify and re-balance, use low-cost index fund (like at Vanguard, for example), keep investing in good and bad markets - stay the course, understand your risk profile to determine your asset allocation.
Thanks for your question and keep up the good work!