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  • Writer's pictureBridget Sullivan Mermel CFP(R) CPA

Whole life vs term insurance: What type and how much to buy?

As a (reformed) life insurance salesman, John talks about what he tells people now that he isn't living off commissions anymore.

Whole life insurance? Term insurance? Most of the time you want term insurance. John explains why. How do insurance companies successfully sell whole life policies? We also talk about how by telling customers that if they don’t die while having life insurance, they’ve wasted money. John suggests what to think about instead.

While every situation is unique and the sales team comes equipped with spreadsheets, John breaks down how much to buy. Generally it amounts to 7-12 times your annual income.

Then there's the issue of who owns your policy. That means, while getting life insurance through work is great, you want to have some life insurance that is not through work, too.

*** More information about John and Bridget ***

Bridget's firm:

John's firm:

Alliance of Comprehensive Planners:


Bridget: How much insurance to buy and what type to buy; there's so many different types of life insurance. Once you know, you're going to get some, how do you pick between the options? Hi, that's what we're going to talk today about on Friends Talk Financial Planning. Hi, I'm Bridget Sullivan Mermel, and I've got a fee-only financial planning practice in Chicago, Illinois.

John: And I'm John Scherer. I run a fee-only financial planning practice in Middleton, Wisconsin. That's a really great question, isn't it, Bridget? Like, there's so many options, we figured, okay. I need…and maybe think about a young family, young kids. We know we need insurance. How do we go about buying it? It's confusing. The agents come in with their spreadsheets and all these things, and it can be a whirlwind. I know I've got some experience in that from my days as an insurance agent.

Bridget: Right.

John: What do you tell people when they're thinking about that?

Bridget: Well, first of all, I like people to get it. I did have an experience with a client who was in their 40s who ended up with a terminal, or what I thought was going to be a terminal, illness. And I was so grateful that we had a lot of life insurance when he was facing this issue. I was really happy about that. So I am a proponent of life insurance, and I am constantly telling people, especially parents with young kids, they need it. But I'm really interested in your expertise on this, John. Tell me about what principles do you usually use when you're helping/guiding people?

John: Yeah. There's sort of three basic things that I talk about with people, and one of them is to own your own life insurance, own it and control it. What I mean by that is many people have coverage through work, and that's great because it's usually pretty inexpensive.

Bridget: Right.

John: But what you don't realize is that they can cancel that policy. Either your employer or the insurance company can drop that policy at any time. And, of course, if you change jobs, you have an issue. And what happens? I'm working for a company. I got really good insurance. And I find out I've got high blood pressure or diabetes or some other thing. And now I change jobs. And now I can't get coverage or it costs me 10 times as much. So when you need the coverage, having it through an independent insurance company, not through your employer is really critical. So that's one piece that people overlook pretty often.

Bridget: Makes sense. Yeah.

John: The other thing is that there's all kinds of different types of policies, and many of them build up cash value. They've got all kinds of fancy names, cash value, whole life, universal life, it goes on and on. And for 99% of people, what you want is term insurance.

Bridget: Right.

John: What it is and what that means is you pay a premium. And if you die, your beneficiaries get paid; no investment, no other component. And the insurance agents and typically the payout for getting somebody to buy one of these cash value type plans might be 10 times three times, four times five times 10 times what it is for the term insurance. So not only is the premium higher for those whole life type policies, the commission rate is significantly higher. So there's a lot of incentive to sell the whole life type things. And again, there are certain people, but it is the rare instance that that makes sense.

Bridget: Yeah, it's very rare. And it seems like there's also this appeal, like the insurance companies understand the feeling that people have about life insurance, that if they don't die, it was a waste of money. And so they…

John: Right, you don’t think like that with your car insurance [inaudible].

Bridget: You don't think, like with your home insurance. “Oh that was a waste of money.”

John: Right, yeah.

Bridget: And I think a lot of people must feel that way. So they have bundled it with a savings element that they tweak to make it sound as good as possible. And it sounds as good as possible to the insurance agents, too. So they sell this stuff. But, you know, it ends up most of the time not paying off for the person. Once they actually wake up and look into this policy, they realize “oh I could have done a lot better if I just paid attention and skipped this and put money into a savings account or put money into the stock market instead of this cash balance policy or this universal or whole life policy.”

John: Right. But the thing that's different about life insurance versus the car and the home insurance is it's not a matter of if you're going to die, right, everybody, unless you know something I don't know yet, right. This is going to happen. And that's what gets played on is well, it's not if it's when. So when you die don't you want to benefit to get paid out because there's going to be expenses.

Bridget: Ahh.

John: It's not when my house is going to burn down or when my roof blows off or what…it's if.

Bridget: Right.

John: So that's where it shifts the conversation. And that's factually true, but what we want to insure is not the when I die, what I want to insure is if I die before I reach financial independence. That's the problem. Right?

Bridget: Right. Exactly.

John: That’s the place where we don't see that. And that's where the sales pitch, if you will, from the insurance side, comes in. It's a certainty that we're going to die. But we're insuring the probability that something happens tomorrow and not in 50 years, right?

Bridget: Right.

John: That's the key difference in there. And so maybe just to be aware as people are talking with an agent about that difference, and then the big one for me is, so we've talked about make sure you own and control a big chunk of your own insurance, get it through work if it's cheap, that's great. But have your own policy.

Bridget: Add some more.

John: And have term insurance, right? That's for almost everybody. And then the big one is like, okay, how much do I buy? And it's individual for everybody. So it's not like “Hey, this is the recommendation and what you should do.” And so you have to take a look at what your expenses are and how much needs are and things. But I'll tell you, that a good guideline to see “Hey, am I at least in the ballpark?” is something like seven to 10, seven to 12 times your annual income. If you're in that range, at least you're not super uninsured or super over-insured. You can't say “Oh yeah, there's a guideline you’ve got to use it.” But you kind of go, listen, if you've got 20 times your income, boy, I'm guessing you're probably over insured when you look at those details. And if you've got less than seven times, you've got five times or less, you have a small family. Like, that's probably not enough coverage, right?

Bridget: Right.

John: So that's a good kind of frame of reference to say when people first come in, I kind of look at that and say “Oh yeah, I'm guessing we're going to have to do some work on their insurance” even though we look at it anyway, that's sort of a thumb in the wind way.

Bridget: Right.

John: And when you break down and you go through, and we go through our analysis, or you work with an insurance agent and they go through theirs, it's a pretty reliable thing. And the older your family is if we're talking about a family situation, the older the kids are usually on the lower end of that, the younger the kids are on the higher end. And one thing I tell people is the big thing, like, the one takeaway that I give to my clients is make sure you have enough. You explained to me about your client and what a comforting feeling it is. And I tell people, you know, a million dollars sounds like a lot of money. And it is if you win the lottery.

Bridget: Right.

John: Raising two kids for the next 15 years. That's not very much money, right? And I got a personal example. My grandparents, both of my grandfathers were both welders back in the 50s. And they both were at that time that was at the high level, new cars every few years. And my grandparents, my wife’s grandparents, so similar situations, single, one child each. And my grandfather died at a young age. He has 57 and didn't have insurance. And my grandmother back in the 50s and 60s, raising a child, it was a little different scenario than it is today. My wife's grandfather lived to an old age and continued to save and do things. And the lifestyle that my grandmother had when I knew her versus my wife's grandparents was night and day difference. And looking back on that thing, boy, if grandpa had enough insurance coverage to make sure that grandma didn't have to work and could do some of these things, could continue to do the savings they were doing that sort of stuff. It's just one of those things that's a rare occurrence, right? It doesn't happen very often, but you had the experience…

Bridget: Yeah, exactly.

John: And I've seen it play out like that’s the thing. You don't want to waste money on insurance, don't waste money on paying for whole life. But make sure you have enough, err on the high side.

Bridget: Right, exactly.

John: Nobody that finds out they're sick has ever said “geez, I'm really sorry I bought too much insurance.” So that's I guess the one big takeaway, as we think to wrap this up is…

Bridget: Yeah.

John: Make sure you get enough, err on the high side and keep it cheap with the term insurance.

Bridget: Right, great. I really appreciate your insight, and this is a great example. Sorry about your grandma. It's really brings it home. Alright. So I'm Bridget Sullivan Mermel. And again, I've got my fee-only financial planning practice in Chicago, Illinois. And this is John Scherer. We're both members of ACP or the Alliance of Comprehensive Planners, which is a group of like-minded, fee-only financial planners all around the country. And you can check out them at And subscribe; it helps our credibility with YouTube, helps other people find our channel. And you can just if you don't want to be inundated, you can turn off the notifications. And I think most people don't find that it's too horrible to subscribe. I think they generally find that people generally like it. Anyway, so with that, let's wrap it up. Thanks, John.

John: Alright. Thanks, Bridget.

Bridget: Okay, bye bye.

At Sullivan Mermel, Inc., we are fee-only financial planners located in Chicago, Illinois serving clients in Chicago and throughout the nation. We meet both in-person in our Chicago office and virtually through video conferencing and secure file transfer.

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