June 22nd, 2006 | 
Author: 
squawcreekrentals asked:
Hi There,
Hi There,
I’m about to get married and have a large amount of mortgage debt (4X my income). That said, half of that is already being more than paid for by renters. I’m just wondering two things: 1) What’s the diff between whole and term life insurance? 2) Do I need life insurance, b/c my partner makes 1/5th of what i make, and if i die, I don’t want her saddled with all my debt.
If I do get life insurance, wouldn’t I want to get a type of insurance that pays me back in dividends and gives me equity, instead of every year paying money to insure my life, and to just “flush it down the drain” if i don’t die?
thanks!
Mary
Posted in Personal Finance | 
Tags: Dividends, Insurance, Insurance Life, Money, Mortgage Debt, Term Insurance, Term Life Insurance
Yes, you need life insurance. Level term insurance is usually the best type. See the “Personal Finance” section of Yahoo Finance for explanations.
Yes, you should get life insurance. The biggest difference between term and whole life is that term will only last for a certain period of time and whole life lasts forever (if you pay the premiums). I would recommend getting both.
Get a decreasing term life policy to cover the cost of your mortgage. The face amount of the policy will decrease as your mortgage decreases so it will cover the cost of your mortgage but will end when your mortgage does. This type of policy is very inexpensive and does not build any cash value.
In addition to that, I would suggest that you go with a whole life policy to supplement your wife’s income if you should pass away. Whole life will be less expensive the younger you are and will stay level your entire life. It will build a cash value that you can borrow from if you ever have to. Also, an advantage of buying whole life at a young age is that when you are ready to retire and living on a fixed income you can use the cash value that you have accumulated to buy a paid up policy, which will eliminate your monthly premiums.
Term life pays a flat amount to you if you should die before the term is up. Whole life also pays that flat amount upon death, but also includes a “savings” component, so the policy gains some value as time goes on.
Term is the better choice for most people because whole life is very expensive. Go look at the premiums — the same coverage for whole life costs something like 8 – 10 times what term life does. Basically, with whole life, you are buying term insurance plus a “savings” policy. The “savings” part of whole life tends not to have returns as high as if you invested on your own (say, in a mutual fund, for example). So basically, with whole life insurance, you are still “flushing down the drain” the part of your premium which was used to insure your life. You just have this combined savings bit that I think “tricks” you into thinking you’ve not done that.
So generally, you would do better by buying term insurance, and then taking the difference between what the term cost and what whole life would have cost, and investing that yourself. (Just watch the
when you do invest yourself — it’s basically the “management fee”, though it comes more in the form of commissions, with whole life that gets you.)
The other reason term is often preferred is that you can be sure to get *enough* coverage. That’s really important. You want to be sure you’ve got enough coverage that your partner will be okay financially after you are gone. You should think a bit about what you want, though — do you want your future spouse to be able to keep this house? Or would it be okay to give her a few years to sell the house and get on her feet? Given today’s housing market, I would be nervous about leaving someone with a mortgage she could not pay, because selling the house might just not be a good option. But everything we do with respect to the future is a bit of a gamble, so you have to balance out what it is worth to you, look at the price of various policies, and figure out how much risk both of you can live with.
If you have trouble sticking to savings and investing, there could be a role for whole life if it forces you to save — you’d just be paying for that additional “incentive” to save. And of course, if you couldn’t make the payments, your life insurance would be at risk, whereas with the “term plus savings” option, you could always skip the savings piece if you were really in a jam without threatening the loss of your life insurance.
I have met this sort of situation before,here is the resource I found helpful.