There are all sorts of things that just don’t combine well together. Sex and food at the same time is just wrong. Stop eating strawberries during sexy time people. Peanut butter and jelly? Gross. Yeah, I said it. And you can’t make me take it back. Take your peanut butter/jelly agenda and shove it somewhere dark. M&Ms and pretzels? STOP TRYING TO PLAY GOD.
And, in what has to be the worst hybrid of all, we have whole life insurance.
For those of you unfamiliar, whole life insurance takes a investment product and has it make sweet, sweet love to an insurance product, to create some sort of insurance-investment hybrid. Whole life insurance takes your monthly premium and invests it in a fund, with some sort of principal protection attached. You pay dearly for that protection, usually in the form of both higher fees and crappier returns.
This compares to straight term life insurance, which is relatively straightforward. You buy a life insurance policy for a certain amount of years (hence the term, uh, term) and you either die or you don’t. If you die, you can enjoy watching your wife’s new boyfriend move into the digs your death paid for, assuming you come back as a ghost. If you don’t die, you’ve exchanged years and years of monthly payments for nothing but peace of mind. It almost makes you want to jump in front of a bus two months before your policy expires. I said almost. Don’t do that.
Back to whole life. As you contribute more and more to the investment, the value of your insurance goes up. There are two values that your policy is worth. There’s a cash value, which is what the product is worth if you decide to cash the thing out, or you can use that as collateral for borrowing against. There’s also the death benefit, which is worth more than the cash value, because you should be rewarded for not being alive anymore. Even though it appears to be an investment on the surface, the return of your whole life policy will always trail the returns the index. Why is that?
It’s simple. The insurance company needs a cut, so they take it in two ways. Firstly, they charge higher fees for these types of products, since there is an insurance element to it. They have to protect their interests somehow. So, not only are you paying for an actively managed mutual fund, you’re also paying for the insurance company to protect your principle. Insurance products exist to do this inside the insurance world, but they obviously cost money. Congratulations, you’ve now paid two fees – one to insure the investment and the other to manage the investment in the first place. Fund managers have a hard enough time keeping pace with the market without an extra insurance fee tacked on.
These insurance products are uglier than Rosie O’Donnell making out with Ellen DeGeneres. The problem is, at least from your perspective, is there’s a whole army of salespeople pushing these things like a cocaine dealer in Lindsay Lohan’s neighborhood. (Almost topical!) This army knows all the buzzwords and sales strategies to get suckers like you to buy in. Besides, whole life policies generally pay a much higher commission than boring old term life insurance policies.
For instance, they’ll tout the guarantee of getting paid when you die. Well, term insurance also pays out when you leave an ugly corpse, and it does so without making you pay enormous fees. If you’re a relatively healthy young person, you can buy a term policy for $20-$30 per month that’ll pay out $500,000 to your wife’s boob job fund. (Hey, she’s gonna be single now) You’d need close to a thousand bucks per month to accomplish the same thing with a whole life policy. As the cliche goes, just buy term and invest the difference.
Of course, it wouldn’t be an insurance post at Financial Uproar (witty penis jokes since 2010) without the obligatory P.S.A. about whether you need insurance in the first place.
If you are single and have no rugrats running around, you do not need insurance. Pro-insurance advocates will try to scare you by threatening you with the fear of future uninsurability. (Is that even a word? Screw it, I’m going with it) Yes, there’s a small chance that a relatively healthy young person may develop a debilitating illness that makes it impossible to get life insurance in the future. There is an incredibly small chance of this happening. People who routinely suck on sticks known to give you cancer find a way to get life insurance. Keep that in mind.
Even if you’re married without a kid, life insurance is still a bad idea. Unless you’re one of those “overprotective” guys who won’t let his wife work, she’s not a liability. Chances are, she’s got more education than you do and makes a decent living of her own. Why would you get insurance to protect her? Chances are, your work benefits plan will pay out enough to bury you, hence negating the only financial liability your death will cause your spouse. Of course, if you actually saved and invested, there’d be enough there to buy even a fancy coffin.
The only time you should buy insurance is if you have something that you cannot afford to replace if you have to. If you can’t afford a new car, then you need to insure the cost of replacing your old one. Have a household that can’t survive without your income? Then you need to insure the cost of replacing your income.
If you extend this logic, then there’s no reason to insure a child’s life, since you’re actually better off financially without that liability. There’s also no reason to insure yourself just because you might not be able get it in the future. Would you buy 18 jars soy sauce because you might not be able to get it in the future? Not unless you’re some sort of weird-ass hoarder.
There. Now you don’t have to waste your money on whole life insurance. Save it for a hooker or something.