In a previous post about the Christian and Insurance, we looked at whether Life Insurance was prudent or showed a lack of faith in the life of a Christian. After concluding that purchasing life insurance was a wise choice, we will examine the nuts and bolts of the two main life insurance products available.
What is the Difference Between Whole Life Insurance and Term Life Insurance?
Term life insurance is very easy to understand. A term life insurance policy provides life coverage only (i.e. there is no investment aspect to the policy). You take out the policy for a given period of time (usually 1 to 30 years), and pay the monthly premiums that you agree to beforehand. You pay the same monthly payment for the entire length of the policy.
Here is an example:
I decide to take out a $750,000 term life insurance policy with XYZ Insurance. The length of the policy is 10 years. XYZ Insurance informs me that the premium payment is $31/month. If I die anytime in the next 10 years, XYZ Insurance will pay $750,000 to the named beneficiary (this will usually be the spouse or children). If I’m still alive after 10 years, the policy will be finished. I can then decide if I want to take out another policy or not.
Whole life insurance is a bit more complex. Whole life combines life coverage with investments. Because of the combination of insurance and investment, whole life insurance is usually much more expensive than term life insurance. There are three common types of whole life insurance: traditional, universal, and variable. For a beginners guide, knowing the intricacies of the three different types of whole life insurance is not essential. The general idea is that part of your monthly premium pays the life coverage and part goes toward some type of investment.
Reasons Why I Think Term Life Insurance Is A Better Option For 99.99% of Christians
- Whole life insurance is expensive! Most Christians of modest means cannot afford the much higher monthly premiums of whole vs term life insurance.
- Whole life insurance has high transactional fees. Not only are high fees involved with whole life insurance, but there are a myriad of different fees you have to pay! There are usually upfront commissions that can be as large as the entire first year of premiums. There are usually ongoing maintenance fees that are paid to the insurance salesman/company. All of these fees really start to add up! It’s difficult for the insured person to detect these fees as disclosure by the insurance salesman is usually lacking.
- Whole life insurance usually under performs other retirement saving options. This is not the post to exhaust other low fee retirement saving options, but it is worth noting that whole life insurance returns usually do not keep pace with other low cost alternatives.
Summary
The main point to keep in mind is that you are looking to purchase insurance, not investments. Term life insurance provides that coverage at a much lower monthly payment compared to whole life insurance. If you are a healthy person w/o many bad habits, term life insurance is downright cheap!
It is worth mentioning that whole life insurance can be a valuable tool if you have a very large net worth. But for the rest of us, term life insurance is a much wiser use of the Lord’s resources.
If you are interested in a resource to search for term life insurance rates, check out www.term4sale.com. I have no financial relationship with term4sale.com. It’s a great website that allows you to compare rates from different insurance companies after entering in some basic information.
Please be very cautious when someone is trying to sell you a whole life insurance policy. Once they get you in the sales meeting, they will use every selling tactic known to man to get you to purchase whole life insurance. Remember that we all have limited resources and want to use what God has entrusted to us in the wisest manner possible.
What has been your experience with purchasing life insurance? Did I leave any important details out between the differences between whole and term?
As a Christian, a husband, a best-selling author, and an owner of two successful companies I must say that I agree with quite a bit of what you said. Especially this paragraph… “Please be very cautious when someone is trying to sell you a whole life insurance policy. Once they get you in the sales meeting, they will use every selling tactic known to man to get you to purchase whole life insurance. Remember that we all have limited resources and want to use what God has entrusted to us in the wisest manner possible.”
I actually spent my first career on Wall Street. What I saw there would truly make the common person nervous to walk into any stock broker, insurance agent, or salesperson’s office (or have them walk into your house). I became very successful as a ‘financial advisor,’ which really just means I sold a lot of mutual funds and insurance. The most important aspect of planning your finances is this – education. Above all, you must be educated. Also, you must have people/mentors in your life that can give you detailed analysis about financial decisions… but you don’t want them to have a vested interest. i.e. You don’t want them to make money from what ever it is you’re thinking of doing.
But, what I have seen over and over again is that the ultra-successful think completely different than the vast majority of Christians and Americans.
The overwhelming problem, in this context, is when we try to give information/advice to a broad group of people. I certainly agree that Here are my three rules of investing:
1. Never Lose Money (from Warren Buffett)
2. Never Invest Your Money Until You’ve Adequately Invested Your Time (from Robert Kiyosaki)
3. And finally – Don’t Do What the Majority Does! (from Warren Buffet & Robert Kiyosaki)
With great respect to the writer of this article – the problem with the advice is that it inherently points to the “buy-term and invest the difference model.” There are significant and unbelievable flaws with that model… and the idea that ‘the simplest answer is the right answer’ when it comes to finance/economics could not be farther from the truth.
I also agree that a family with little to no discretionary income should always buy term – every time.
For those that have above-average incomes and/or discretionary income, you should have a much more in-depth of what you are or are not investing in. Remember – “Don’t invest your money until you’ve invested your time.”
Buying mutual funds or random stocks and bonds have never created wealth. I think back to the Parable of the Talents:
The master (CEO in our terms) has given three employees ‘talents’ (‘bags of gold’ in some translations) or some form of currency. He gives the most capable person 10 talents. He gives another person 5 talents. And the third person he gives one talents. The first two employees, whom he gave 10 and 5 talents respectively, go out in the market place and create production from what they’ve been given. The third person buries his one talent in the ground, fearing that if he lost it the master would punish him. The master comes back and has this to say to the person who did nothing with his talents:
28 “‘So take the bag of gold from him and give it to the one who has ten bags. 29 For whoever has will be given more, and they will have an abundance. Whoever does not have, even what they have will be taken from them.
This notion is completely contrary to popular world economic thought. And it comes close to being extremely politically incorrect.
The world says take from those who have produced and give it to those who have not. God says I will take from those who do not produce and give it to those who can handle more responsibility.
(Then, of course, it is up to the Church to take care of those who cannot take care of themselves. It is not however the responsibility of the Church to take care of those who choose not to produce.)
The overarching problem with saying that life insurance is a bad place to put money is that that’s not what the ultra-rich will tell you. Banks, corporations, and many ultra-successful people that use life insurance as an asset. I’ve consulted with these people. I’ve done research with them and about them.
The way they use it and the way the structure it are somewhat complex… too complex to discuss here. They don’t see life insurance as an investment. They see it as an asset and a holding place for the money God has given us.
Sticking your money in mutual funds is similar to the one talent man burying money in the ground and turning your head (and this can be proven historically).
These ‘successful’ people that I elude to use money/cash-value within life insurance (specifically low commission, high cash-value life insurance) to make God’s money work better and faster. They actually use their cash-value to invest in rental properties, land, businesses, precious metals, and sometimes even the stock market. This is what I consider the 10 talent person.
I am not trying to sell life insurance. I am trying to help educate people on what successful people are doing.
Chase, thanks for stopping by and commenting. Your comment was long, so I will do my best to respond to the points you made.
First of all, this blog is not intended for ultra-wealthy Christians. It is intended for everyday Christians who want to better manage the resources the Lord has entrusted to them. I highly doubt anyone with an extremely high net worth (define that however you want) is reading personal finance blogs trying to decide whether to buy term or whole life insurance. I also made a specific point of mentioning that whole life insurance does make sense for high net worth individuals sometimes. Again though, those types of individuals are not who this blog is written for.
Most people are trying to decide how to pay all the bills for the month. Most are wading through large amounts of false information put forth by people trying to sell them something. Most are hoping to make it through the week. They aren’t worried about what extremely wealthy people are doing (and for good reason). You can try selling all the newsletters you’d like, but the majority of people are never going to be wealthy. Though the blog is only a few weeks old, if you read some of the other posts you’ll see I’m not going after “rich Christians.”
So with the above two paragraphs in mind, blanket advice like, “buy term and invest the rest” is appropriate. The simplest answer is the right answer for the majority of Americans. Our country is in such poor financial health at the governmental and individual level that blanket advice is not only appropriate but necessary!
I may be misreading the tone of the rest of your post, but I get the idea that you think all Christians should be rich or desire to be rich. Unfortunately, the prosperity gospel is not the message taught within the 66 books of the canon. Consider the following verses:
Remove far from me falsehood and lying; give me neither poverty nor riches; feed me with the food that is needful for me, lest I be full and deny you and say, “Who is the Lord?” or lest I be poor and steal and profane the name of my God. Proverbs 30:8-9
Do not toil to acquire wealth; be discerning enough to desist. When your eyes light on it, it is gone, for suddenly it sprouts wings, flying like an eagle toward heaven. Proverbs 23:4-5
It is easier for a camel to go through the eye of a needle than for a rich person to enter the kingdom of God. Mark 10:25
Again, if I have misread the intentions of your comment, I apologize. Thanks for stopping by and commenting!
Oliver
Why would whole-life insurance be better for wealthy people?
Thanks for commenting Loren. I don’t think whole life insurance is better for wealthy people. I should have done a better job explaining myself.. There are specific situations when whole life insurance MIGHT be a good idea for a wealthy person. Some examples might be:
-A person who needs to guarantee that the estate taxes can be paid on a large estate so that the assets do not have to be sold quickly at lower than market value.
-A partnership might require the partners to have a whole life policy in order to buy out the heirs so the partnership can continue to operate.
Sometimes term life insurance will cover these needs, but other times it might not be sufficient. But for the majority of people, these are scenarios they will never encounter. Hope that clears it up a little bit.
I am not sure how I stumbled across this article, but man, I wish I had not. As a born again Christian for 20 years, one that goes to church, tithes, reads the Bible, etc. I just couldn’t possibly disagree with you more.
I am actually offended at almost the entire article as you have this unreal thought process and belief about Chisristians in general. You are clearly a Dave Ramsey fan and I guess that is okay, but to make it sound like God wants us all to live paycheck to paycheck and not prosper upsets me. There are many parts of the Bible that talk about wanting his children to prosper, to receive many fold back upon what they give, and nowhere does it state we should not work hard and try to become wealthy as long as we do it properly, tithing, and asking the Lord’s will to simply be done in our life.
With all that being said, none of us are the JUDGE as their is only ONE and we answer to him one day so I will respect your opinions for what they are.
My 2 cents are that it has been proven over and over that “buy term, invest the rest” does not work and that “buy whole, invest the rest” is actually much more ideal over a period of time. If all of your readers are low income then buy term as it’s cheap…the end.
If you really took the time to learn about whole life, and I am talking about meeting with a trusted advisor who knows 1,000 times more about the product than you, 4 or 5 times for 2 hour sessions, then you will be surprised to find how flexible, valuable, WL can really be in one’s portfolio. I promise you with 100% certainty you know maybe 25% of what WL really is….I urge you to take the time to learn the rest.
You say WL often gets outperformed by other risk-free options? like what? a saving account, a CD, a money mkt account? NO. Show me an account like that which will triple my money in 35 years, make 4-5% tax-free, penalty-free, plus have an escalating tax-free death benefit that covers me far past my term expiring. I’ll take my +18% in my 401k last year, but the 11 years before that I averaged 1% (not the 12% DR says I will magically get investing into “large cap mutual funds” like as if that helps anyone understand anything as deeply complicated as a 401k or IRA, all if it’s ongoing fees, hidden fees, and pending taxes & penalties.
Term life policies in the US are only used 1% of the time. So 99% of term life owners will outlive their death benefit and have thrown that 50 bucks into the garbage for 30 years, die without a death benefit, and have to use their 401k for final expenses and legacy.
I have 3 WL policies and it was the best decison I ever made. My biggest regret after playing the market for last 15 years, is not putting more into those policies when I was younger and healthier as that is what this is based on. I will continue to invest, take some risks, but WL is what gives me peace of mind when thinking about 30-50 years from now knowing we’ll have a boatload of cash values and when I pass my wife, kids, grand kids will be well protected.
Kevin,
Thanks for stopping by. Sounds like we wouldn’t agree on whole vs term life insurance or much else in life. Thanks for taking the time to comment!
Update: Forgot to mention I’m not really a “Dave Fan” outside of what he does to help people get out of debt. Thanks again for reading!