posted on September 18, 2019 by Peggy Doviak

Ask Peggy About Term or Whole Life Insurance

Have you ever heard the financial phrase, “Buy term and invest the difference?” It’s a common saying, and sometimes, it’s great advice. However, like all financial issues, the decision is a little more complicated than it might look.

Let’s start by reviewing the advice. The recommendation is to purchase term life insurance rather than whole life. Term policies are typically cheaper, so the money saved in premiums could be invested. The growth of this money is supposed to provide income after the term policy expires. Remember that term is temporary, while whole life is permanent. But is the advice sound?

First, the CERTIFIED FINANCIAL PLANNERTM Board of Standards says the purpose of life insurance is to manage the financial risk associated with your death. As a result, the primary purpose of insurance would not be as an investment or savings vehicle.

When you are trying to decide on the type and amount of insurance, I think it’s difficult unless you take a cash flow perspective. How much money do your heirs need, and how many years does the need exist? Looking at their income requirements during different periods of their lives is a great way to start.

If their financial risk has a definite end (like a mortgage), term might make sense, but if the risk is ongoing, then whole life might be preferable. If you are considering term, it’s important to look at the difference between whole life and term premiums. If you invest this sum of money at a reasonable rate of return, does that sum provide enough cash to meet any needs when the term ends? If it does, then the strategy might work for you and them. However, remember you must adequately calculate their needs and not assume a rate of return higher than the one they actually earn. Additionally, by the time your term policy expires, you may not qualify to purchase a whole life policy, so be careful as you make your calculations.

Finally, the biggest risk to buying term and investing the difference is that you really have to invest it! Too often, the money just disappears into your bank account. This error can lead to catastrophe if you die after the term policy has expired and you haven’t made additional plans. But with a little thought now on the part of you and your financial team, you can help ensure your heirs will have the resources they need, even if they can’t replace you!

Peggy Doviak

Peggy Doviak

When Peggy Doviak’s mother got taken to the cleaners by an unscrupulous stock broker, Peggy got mad. She was so angry that she changed careers from corporate training to financial planning because she wanted to ensure that what happened to her mother never happened to anyone else. She has been committed to putting her clients first through a fiduciary relationship from the first day, not even knowing then that her position was optional and unpopular to many so-called financial advisers. But she’s learned a lot. She earned her CERTIFIED FINANCIAL PLANNERTM practitioner designation and went on to earn a Master’s in Finance with an emphasis in Financial Analysis even though she already had a Ph.D. in education. Active in her profession, Peggy works with financial literacy organizations, hosts a Knowledge Circle for the Financial Planning Association, writes a column for the Journal of Financial Planning, and is a member of the Women in Finance (WIN) Initiative of the CFP Board. She is a consumer advocate for fair financial practices both locally and nationally through her membership on the Legislative and Regulatory Issues Committee of FPA, and she enjoys meeting with lawmakers in Washington, DC. However, perhaps Peggy’s greatest shaping of the profession has come through staying in education. She has taught literally thousands of financial advisers in classes covering advanced certifications, the preparatory curriculum for the CFP exam, and master’s level courses in financial planning. Although Peggy Doviak can’t keep every consumer safe, she keeps trying.

Peggy Doviak Contest

Peggy Doviak is giving away a copy of her award-winning, #1 bestselling book, 52 WEEKS TO PROSPERITY: ASK PEGGY DOVIAK. Reading one short chapter a week and completing the activities will help you plan your prosperity in a year!

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