Whole life policies ... and alternatives

QWhen my financial adviser suggested whole life insurance, I just about fell off my chair! Now, I'm actually considering it and wanted to get your opinion. I'm 56 and have been putting everything in my 401(k). I have a home, and that's pretty much it.

I have term life insurance that will end when I'm 66 -- I won't care to pay the escalated premiums beyond that. What I'm hoping for is that whole life will round out my portfolio to the extent that I'll have the death benefit, dividends and cash value. I felt this was a reasonable option, keeping in mind that the stock market is a little concerning.  Have you been seeing whole life policies come in the picture a little more these days?

GREG

ARather than say whether I think whole life insurance is a good idea for you in particular, I want to lay out my reasons for skepticism about whole life in general. Despite the credit crunch and Great Recession, I'm still not a fan of whole life insurance as part of a retirement savings strategy for the average middle-income, middle-class family.

First, a quick definition of the two main kinds of life insurance. Term life insurance is a pure death benefit. It financially protects your loved ones against your untimely death. The term life market is highly competitive, so premiums are relatively cheap if you're in good health. It's a simple product that allows for extensive comparison shopping.

But term life gets more expensive as you get older until it no longer makes economic sense. You will have built up your finances over the years, with a home (and hopefully no mortgage), retirement savings and savings.

Permanent or cash value life insurance comes with a tax-sheltered savings component as well as life insurance. The savings can go into a variety of investments, including stocks, bonds and money market-type instruments. An attraction of this kind of insurance is that you can borrow against the cash value. More importantly, it's a forced savings plan. The main policy types are whole life, universal life and variable life. In general, these policies are expensive, with steep fees and commissions that reduce returns.

Don't get me wrong, cash value insurance is a legitimate product that makes sense for some people. It's particularly appropriate for anyone with sophisticated estate-plans and people with a need to financially protect loved ones even late in life.

A critical question is why there is a life insurance need when older? Boosting long-term savings is important. But you can always create your own forced savings regimen by having money automatically removed from your checking account and put into a savings account or mutual fund. It's easy to keep fees down this way and to know what rate of return you're getting on your money. I prefer keeping investing and insurance separate.

Chris Farrell is economics editor for "Marketplace Money." Send questions to cfarrell@mpr.org.

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