From: "Brent D. Gardner, ChFC" 
Newsgroups: misc.invest.financial-plan
Subject: Re: whole life versus term life insurance
Date: Tue, 20 Jan 2004 15:30:59 CST
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"Greg Frey"  wrote in message
news:d87ba9e3.0401200700.6e2a24b7@posting.google.com...
> Hi
>
> Is there a tutorial somewhere on the net that can give me the pros and
> cons of whole life versus term life insurance? Maybe someone here can
> point me to an FAQ or beginner's tutorial of somekind. I'm having a
> difficult time figuring out which is the best choice for me.

Conventional Wisdom says to buy term for temporary needs and permanent
insurance (whole life, universal life, variable universal life) for
permanent needs.

The is often followed with archaic advice that says that items like
mortgages and debts are temporary. Why is that advice archaic? The law now
prohibits discrimination in lending based on age. Last year, I wrote life
insurance to cover a mortgage on men and women with ages such as 68, 73, 77,
84. In the past, banks wouldn't make these loans, but now they have to. At
older ages, term isn't available for new issue.

Most of the contention between whole life and term life has to do with
potential investment returns if one invested "the difference" between the
two in a side fund. On paper, when one is young, this appears to favor term
insurance, although I've never seen ANY lay author or armchair advisor run a
stochastic analysis to support their theory. They rely solely on
deterministic analysis, which is guaranteed to be faulty. For example, any
comparison between whole life and a stock mutual fund is faulty. This
assumes that everyone has the same risk tolerance, same risk capacity, same
tax bracket, same needs.  An analysis can be performed on a case by case
basis, with results covering the entire spectrum, which totally destroys any
"one-size-fits-all" argument, so be extremely wary of anyone that tells you
automatically one way or another. Life just isn't that simple.

Some of the less than obvious reasons why death benefits are needed on a
permanent basis:

1. Social Security "Blackout Period" -- When a surviving spouse has no kids,
or after the kids are age 16 and up, the surviving spouse receives ZERO from
Uncle Sam, until age 60, when he or she can apply a whopping 2 years early
for the reduced Social Security retirement benefits.

2. Social Security Retirement Benefits are reduced by 50% when the primary
insured dies, often leaving many widows wondering how they are going to pay
their bills.

3. Defined Benefit pensions ALWAYS pay a reduced benefit if one wants to
include a spouse in the benefit equation. A permanent death benefit
solution, properly structured, can actually maximize retirement incomes, AND
provide for higher incomes to the survivor. Defined benefit plans are coming
back, after two decades of slowly disappearing. Most government entities
have maintained theirs over the years (civil service, military, federal).

4. Estate taxes -- they aren't going away, they are actually getting worse.
The "death tax" gets some press, but other taxes don't even get mentioned,
even though they affect more people. The Federal Estate Tax Credit to States
for their Estate Tax -- the "sponge tax" -- is being phased out. States are
already short on funds, so they are enacting their own estate taxes. For
example, Kansas taxes estates starting at $700,000, NOT $1,500,000 as the
Federal Government does today. Plus, we have an inheritance tax starting at
$30,000. Outside of attorneys and accountants that specialize in the wealth
transfer areas, I find many who aren't even aware of these taxes. For that
matter, most insurance agents don't know, either. Food for thought -- The
Estate Tax predates the Income Tax in this country by about 100 years. It
has been repealed a handful of times, only to reappear a few years later,
more complex and with higher rates than ever before.

5. Many couples aren't marrying anymore. People who are already divorced,
often postpone marriage indefinitely, even though they may enter into shared
living arrangements. The traditional family unit is now less than 25% of
households in the USA (source: US Census). Unmarried couples do not receive
the same tax benefits when one partner dies as those who are married, even
though they may intend for their significant other to receive an
inheritance. Proper planning can deal with this issue, but failing to plan
often results in extraordinary problems, including expensive litigation.

6. Business Continuity/Succession Planning -- this is often overlooked by
small business owners, and their advisors. The segment of the population
that is self-employed is growing again, and may one day be larger than the
segment employed by someone else. It is common that some, but not all, of
heirs want to continue the business, upon the death of the owner/founder.
Making an estate 'equitable' (not necessarily equal) with intentions spelled
out, and promises funded, makes for an easier transition, with the lowest
toll. Fail to plan, and families will divided and fight, with tragic
results. These needs are rarely temporary in nature.

7. Special Needs Children -- One of the benefits of modern medicine is that
offspring that used to die of natural causes now live much longer, often
approaching normal lifespans. Death benefits to care for dependent children
normally disappear when the children are grown, but in the case of an heir
with health or mental issues that are permanent, requires a permanent death
benefit solution.

Questions?  Comments?

Brent D. Gardner, ChFC
Chartered Financial Consultant
http://members.cox.net/brentdgardner1378/

"Be ever questioning. Ignorance is not bliss. It is oblivion. You don't go
to heaven if you die dumb. Become better informed. Learn from other's
mistakes. You could not live long enough to make them all yourself." - Hyman
George Rickover (1900-86), Admiral, US Navy, advocated development of
nuclear subs & ships

The Chartered Life Underwriter (CLU) and Chartered Financial Consultant
(ChFC), designations owned and exclusively offered by The American College,
signify the highest standards of academic study and professional excellence
in the financial services industry.