Dear Millennial, You Don’t Need Whole or Cash-Value Life Insurance

I had a lovely reader email me a lovely question this week, and it made me so mad at the insurance industry.

So millennials, listen up: you do not need whole life insurance.

You do not need cash-value life insurance.

You need term life insurance. (Maybe. If you want life insurance.)

And since to most people, those all probably sound like finance gobbledegook, I am using this week’s post to (hopefully) drive a Buffy-the-Vampire-Slayer-style stake through the heart of any doubt in your mind that term life insurance is definitely the droid financial product you are looking for.

So you think you need life insurance?

First of all, you get points for even realizing that you might want to look into life insurance. Usually, life insurance is a good fit for people who…

  • Have dependants who rely on their income
  • Have a partner who relies on their income
  • Have shared debts or financial commitments that would be a burden to people they love if they got hit by a bus

A lot of the time, that’s like, kids and a mortgage, but don’t let me tell you how to live your life.

If you just signed an iron-clad three year lease on an apartment in Toronto with your life partner, that’s a financial commitment, too–and unless you two were super-frugal or won the apartment lottery, I’m guessing you’re counting on both incomes to pay that rent bill.

Maybe you have three dogs, all of whom have ridiculous medical bills, and you want to make sure that your parents can keep paying all of the dogs’ medical bills if you die. Again, I don’t know your life! (But like, please tell your parents if this is your plan, and make sure they’re down.)

The point is, you think you need life insurance, and if your reason is “So my loved ones (pets included) will be OK financially if I die,” you want term life insurance.

What does term life insurance do?

It pays your beneficiaries a set amount if you die. The end.

You choose an amount of coverage that makes sense for your life and your commitments, and you shop around to see how much that coverage would cost you every month. To give you a sense of how cheap term life insurance can be if you’re young and in reasonable health, I ran a quote comparison at Lowestrates.ca (not a sponsor, just the company I actually used when I bought my life insurance.)

As a 28-year-old, non-smoking woman, guess how much it would cost me per month to get a cool $500,000 in term life insurance with a 20-year term?

Seriously, guess.

Nope, it’s lower than that.

It’s $20 a month.

No bells, no whistles, just $500,000 if I die in the next 20 years, paid out tax-free to The Fiance. (Who will totally be The Husband by then.)

So then what is whole life insurance?

Whole life insurance, cash-value life insurance and “participating” life insurance are not just life insurance. They do more than pay out money if you die in a tragic hot air balloon accident.

What exactly they offer is dependent on the policy someone is trying to sell you, but you’ll know it’s not just term life insurance if they offer you any of these delightful options:

  • A lump sum cash payment at the end of your insurance term
  • Dividends
  • Withdrawals from your life insurance “account”
  • A guaranteed payment when you die, no matter how old you are (try getting a new term insurance policy on a 90-year-old. It’s not a thing, and if it is, it’s prohibitively expensive.)

If any of those come standard with your insurance policy? You are being sold some kind of cash-value or whole life policy. And trust me when I say you’re being sold: Most insurance brokers work on commission, and the premiums you’ll pay for a whole life policy or a cash-value policy are going to be way higher than a term policy.

If their commission is 40% either way, 40% of a much higher premium is much more money.

But just because they cost more doesn’t mean whole life policies and cash-value policies aren’t useful products. They’re just probably not useful products for you, my millennial pal.

Here’s why people might use a whole-life or cash-value policy

For some people–some people–a whole life insurance policy can be a useful financial product.

It can act as a tax-free way to shelter the growth of your money, so if that’s a thing you’re constantly thinking you could use, well… there’s that.

With some policies, you can keep it for your whole life (see what they did there?) so it pays out a benefit no matter when you die–so if you know that your death is going to trigger massive estate transfer taxes and your estate won’t have enough cash to cover it, you can use a whole-life policy to make sure money is there for your heirs to pay the taxes. (This is, apparently, a popular strategy to keep cottages that have soared in value in the family, for example. I know, eat the rich, whatever. Let’s move on.)

And yes, there will be policies will pitch you on a cash payment at the end of your term, if you’re not going with the keep-it-till-you-die strategy. A lump sum payment in 20 years sounds pretty great, right?

But here’s why you, my darling millennial, do not need that

Let’s get the easy, obvious questions out of the way: Do you have heirs? Are you rich enough that your heirs will need to pay taxes on your assets and your estate won’t have the cash to cover it?

No?

Great. Whole life insurance is not a thing you need. But what about cash-value policies?

I did a bit of digging, and here’s what they really do. If you have a cash-value policy, you’ll pay a much higher premium than a term policy–let’s estimate $100 on top of what you’d pay for term coverage with no cash benefits.

So instead of paying $20 a month, you’re paying $120 a month for the same amount of in-case-you-die coverage.

The extra $100 is held for you by the insurance company, and invested by them in whatever the h*ck they want to invest it in. They’ll choose an asset mix to suit their corporate goals, because you know, YOLO. They’ll also charge a management fee on the assets.

When your term is up, they’ll pay out the amount they agreed to pay you at the beginning of your term. That’s the cash-value part, and it’ll be exciting when you get it!

But.

(Obviously there’s a but.)

What if you had invested that $100 in an RRSP or a TFSA every month instead? Both of those are tax-sheltered accounts, and can grow either tax-free or tax-deferred, so unless you’re maxing them both out, you don’t need another tax shelter for your money just yet.

Plus, if you’re investing it in your own accounts, you’re free to choose investments that actually suit your needs–not the needs of the insurance company. Not to get too deep in the money weeds here, but the one insurance company I looked into was invested 75% in bonds, which is hella-risk-averse.

Makes sense for them, but maybe not so much sense for you if you’ve got a 30-year investing horizon. (Longer horizons mean you should be OK with more risk, generally speaking. If that makes no sense to you and you want a beginner-friendly primer on investing, here’s a free five-day email course that does exactly that.)

Wait, I’m totally lost right now

Was that all a bit financial-overload-y? Yeah, I figured it might be, so here’s the actual bottom line.

If you don’t fully understand a financial product, you probably don’t need it.
(Or, you need to learn more before you buy so that you can make sure you really do need it, but that’s much less pithy.)

When it comes to insurance, you should be able to confidently explain, in your own words, why you bought it and what it does before you sign on the bottom line.

If you need it to pay out a specific amount of money if you unexpectedly die in the next 10, 20 or 30 years? You need term life insurance.

If you need it as part of your tax planning or estate planning with a financial professional you know and trust? Great, you might need whole-life insurance or cash-value insurance.

But until those things are true–and for most millennials I know, they aren’t true yet–don’t let anyone convince you that you need more than term life insurance.

(If you really want that cash value they’re dangling in front of you, get a term policy, then open up a Wealthsimple account and deposit the $100 there every month instead. You are someone who reads financial blogs, I guarantee you are able to do that, and you don’t need an insurance company to force you to save money.)