Here’s some bad advice: Buy whole life insurance instead of term.

Few advisors would give that advice. Are they correct?

Term insurance has many benefits. It’s far less expensive than whole life (also called “cash value”) insurance. The lower cost permits you to buy more protection, which is the primary benefit of insurance.

Standard advice to investors is to “buy term and invest the difference”. But a new study found that purchasers of term insurance “most likely rent the term and spend the difference.”

A benefit of whole life insurance is that the cash value guarantees in these policies always increase in value over term. A portfolio of stocks and bonds has no such guarantee.

Whole life insurance has other benefits, including the ability to borrow against the cash value.

You can buy a term insurance policy that can be converted to a whole life policy, without additional evidence of insurability.

Here’s my bottom line: You need to be sure your loved ones have adequate insurance protection in the event of your untimely death. Term insurance is appealing because of its lower cost, but consider the benefits of a policy that can be converted to whole life.

If you can afford the higher premiums, a whole life policy can be a way to accumulate significant cash value over time through “forced” savings. If your premiums will be $10,000 a year or higher, I recommend you retain a fee-only insurance advisor to assist with your purchase. You can find a list of fee-only insurance advisors here.

Insurance is a complicated subject. The benefit of a fee only insurance advisor is they don’t profit from any decision you make. They act as a fiduciary and have no conflicts of interest.

My experience is anecdotal. I know many investors who ended up with a significant nest egg by investing in whole life insurance. Don’t fall for the mantra of “buy term and invest the difference” without giving it considerable thought.

Resource of the week:

I recommend this blog by Mary Beth Franklin. She correctly notes that standard advice about buying term instead of whole life “…leaves many Americans underinsured and unprepared for retirement.”

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