Whole life or term life?

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ktd
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Whole life or term life?

Post by ktd »

My dad is turning 55 soon. He wants to buy life insurance. According to him, he can buy term life insurance for 300K for 10 years for $526 a year or $3,000 a year for whole life. His wife or my step mom is 17 years younger than him. They have a 5 year old. Which plan should he buys?
The Wizard
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Re: Whole life or term life?

Post by The Wizard »

Term life, no brainer...
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Re: Whole life or term life?

Post by Jack FFR1846 »

Term life protects the beneficiaries if he dies

Whole life provides a new BMW for the insurance salesman, a constant stream of unearned income for the insurance company and the same benefit for the beneficiaries.... At 10 times the cost


Buy term
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ktd
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Re: Whole life or term life?

Post by ktd »

He is wanting to buy whole life. His reason is: if he invests $250 a month for 30 years (when dad turns 85) at 4% annual rate of return after inflation, step mom will only get 175K. If he buys whole life, step mom will get 300K when he dies. His parents died at age 67 and 71.
NOLA
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Re: Whole life or term life?

Post by NOLA »

There are people that can explain it much better than me, but term life is almost always better than whole life. However, salespeople unfortunately often steer you towards whole life. I wonder if the sales rep will actually tell you how expensive whole life really is.

Good luck and you will get some great advice here
bsteiner
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Re: Whole life or term life?

Post by bsteiner »

If inflation is 2%, then 4% after inflation is 6%. At 6%, $250 a month for 30 years will be about $250,000. If he buys the term insurance he can also invest the $250 a month (actually $206 since he'll have to pay for the term insurance), so if he dies while the policy in effects his beneficiaries will get the $300,000 insurance proceeds plus whatever $206 a month grows to between now and his death.

Unless he intends to work for another 30 years he might not need insurance for 30 years. However, if he's concerned that a 10-year term policy might run out while he still needs insurance, he might want to consider buying, for example, two $150,000 policies, one for 10 years and one for 20 years.
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SkierMom
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Re: Whole life or term life?

Post by SkierMom »

He is wanting to buy whole life. His reason is: if he invests $250 a month for 30 years (when dad turns 85) at 4% annual rate of return after inflation, step mom will only get 175K. If he buys whole life, step mom will get 300K when he dies.
No - If your dad is willing to spend $3,000 per year, take $526 to buy Term Life for $300,000 AND take the remaining amount per year $2,474 invest it in a low-cost Index Fund that will average 8% return.

If your dad passes away in 15 years, your step-mom will have $300,000 + $78,000 = $378,000

If your dad passes away in 30 years (like your example above), your step-mom will have $300,000 +$315,000 = $615,000

Buy Term.
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Re: Whole life or term life?

Post by nisiprius »

Term. The insurance companies don't have any magic investments, they can't do anything better with the extra money than he can do himself. They invest it in something very safe and conservative that may or may not match what'd he'd do for himself yourself, they make it so obfuscated and intwingled that almost nobody has any idea what their investment really is or what it's doing, then they talk a lot about the good parts... and since it's hard to understand what's going on, it's easy for them to hide the high fees and the mediocre investments.

If he's determined to do what he wants to do, it may not be an awful thing. If he really wants your input, then term.
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Topic Author
ktd
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Re: Whole life or term life?

Post by ktd »

SkierMom wrote:
He is wanting to buy whole life. His reason is: if he invests $250 a month for 30 years (when dad turns 85) at 4% annual rate of return after inflation, step mom will only get 175K. If he buys whole life, step mom will get 300K when he dies.


If your dad passes away in 15 years, your step-mom will have $300,000 + $78,000 = $378,000

If your dad passes away in 30 years (like your example above), your step-mom will have $300,000 +$315,000 = $615,000

Buy Term.

Sorry but I don't get your math.
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Matahari
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Re: Whole life or term life?

Post by Matahari »

ktd wrote:My dad is turning 55 soon. He wants to buy life insurance. According to him, he can buy term life insurance for 300K for 10 years for $526 a year or $3,000 a year for whole life. His wife or my step mom is 17 years younger than him. They have a 5 year old. Which plan should he buys?
ktd,

I'll let others convince your father of the merits of investing the difference between $3,000 and $526 a year for 10 years.

But, here is the big thing: paying $526 each year is a great deal easier than paying $3,000 each year, especially as he gets older and plans for retirement. If protecting his young child and wife are his main considerations in the event of his death, he should consider increasing the face amount of his level TERM policy.
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Re: Whole life or term life?

Post by Jack FFR1846 »

Also, they sell whole life with a rate*

Do you know what the * means?

It means NOT guaranteed.
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Re: Whole life or term life?

Post by BruDude »

Why is he only considering 10-year term? If his wife is 17 years younger and the child is only 5, it seems at least a 15-20 year term would be more appropriate. He could still get 30-year term with some companies at his age too.
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Re: Whole life or term life?

Post by dhodson »

With permanent insurance you are ALWAYS paying the insurance plus the investment piece. There is no special deal. They invest primarily in bonds but have huge fees/commissions which drag the return. The insurance piece is also more expensive (just check the term rates for the company selling the whole life and you will find it isnt near the cheapest). The only ways whole life are going to be better is IF the company rates him wrong meaning they say he is super healthy and will live extra long and they are way off base AND he outlives the term purchased OR if he invests in real low producing high fee products or does something else silly with his investments where in essence he loses it all. There is no magic investments for the insurance company. Also paying monthly for whole life has a finance charge likely around 15% or more compared to paying yearly which he doesnt seem to know. Most people surrender whole life after they purchase it bc they realize too late what they have done. There are tons of threads on whole life on this site.
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Re: Whole life or term life?

Post by edge »

This may be a case where permanent life insurance makes sense. He might consider universal life. Another option is to investigate group life insurance options at his employer and understand the age limitations/conditions/underwriting. The fact of the matter is that this guy has huge liabilities that will extend beyond his likely mortality and needs to cover that risk. Unless he is wealthy - but I assume he is in a 'work till dead' mindset.

He will not be able to get term beyond a 10 year. which would leave him and his family potentially exposed.

I noticed some poster said he could invest in an index fund returning 8%. An 100% equity investment for a 55 yr old does not sound like a great idea to me.
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Re: Whole life or term life?

Post by 2comma »

Another way to look at it is how much term life can he get for $3000/yr? Then ask him why is it so much higher than the $300k he'd get from whole life.
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Re: Whole life or term life?

Post by Theoretical »

The answer is neither. This is one of the situations where a permanent policy makes sense, simply because of his age, and because he has a young child to support. A whole life policy is a money pit for this use but his eligibility for term is likely to run out in the future.

What comes to mind is a universal policy structured to be almost entirely death benefit, with just enough cash value to offset the increase in premium as he gets older. This is the same kind that is used for irrevocable life insurance trusts for estate tax issues.

The other one to consider is group insurance. I'm a member of AAA and was going through some old correspondence and was surprised to find annually renewable term insurance up to age 80, with premium increases every 5 years.
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Re: Whole life or term life?

Post by dhodson »

Theoretical wrote:The answer is neither. This is one of the situations where a permanent policy makes sense, simply because of his age, and because he has a young child to support. A whole life policy is a money pit for this use but his eligibility for term is likely to run out in the future.

What comes to mind is a universal policy structured to be almost entirely death benefit, with just enough cash value to offset the increase in premium as he gets older. This is the same kind that is used for irrevocable life insurance trusts for estate tax issues.

The other one to consider is group insurance. I'm a member of AAA and was going through some old correspondence and was surprised to find annually renewable term insurance up to age 80, with premium increases every 5 years.

That is probably NOT a good idea in this situation. No lapse gUL can be very dangerous in a situation where sufficient income isnt available to keep it in force. This person is considering paying their term monthly, thats not the same situation as a rich person with an irrevocable trust. The moment this person is even late on a payment then they will lose the no lapse guarantee and if the payment isnt immediately coughed up then the policy goes bust for zero regardless of years they have been paying. Insurance just isnt a magic bullet for a situation where someone hasnt saved properly. While i dont feel insurance beyond term is the answer (and of course i dont work in the insurance industry), if i wanted an insurance solution for this case with what has been written so far, id get an overfunded up to MEC WL blended with 1-15 years of term. IF the situation is such where the person actually has a bunch of money and there isnt risk of lapsing a policy (so really they dont need the insurance but for some reason want it) then id consider the no lapse gUL preferrably a short pay period like 10 if that could be afforded.
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Re: Whole life or term life?

Post by The Wizard »

At 55, I had a decent investment portfolio size.
Self insurance is feasible at some point, especially if the other spouse makes a decent income as well.
Life insurance isn't necessary for everybody and especially not to retirement age...
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ktd
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Re: Whole life or term life?

Post by ktd »

dhodson wrote:
Theoretical wrote:The answer is neither. This is one of the situations where a permanent policy makes sense, simply because of his age, and because he has a young child to support. A whole life policy is a money pit for this use but his eligibility for term is likely to run out in the future.

What comes to mind is a universal policy structured to be almost entirely death benefit, with just enough cash value to offset the increase in premium as he gets older. This is the same kind that is used for irrevocable life insurance trusts for estate tax issues.

The other one to consider is group insurance. I'm a member of AAA and was going through some old correspondence and was surprised to find annually renewable term insurance up to age 80, with premium increases every 5 years.

That is probably NOT a good idea in this situation. No lapse gUL can be very dangerous in a situation where sufficient income isnt available to keep it in force. This person is considering paying their term monthly, thats not the same situation as a rich person with an irrevocable trust. The moment this person is even late on a payment then they will lose the no lapse guarantee and if the payment isnt immediately coughed up then the policy goes bust for zero regardless of years they have been paying. Insurance just isnt a magic bullet for a situation where someone hasnt saved properly. While i dont feel insurance beyond term is the answer (and of course i dont work in the insurance industry), if i wanted an insurance solution for this case with what has been written so far, id get an overfunded up to MEC WL blended with 1-15 years of term. IF the situation is such where the person actually has a bunch of money and there isnt risk of lapsing a policy (so really they dont need the insurance but for some reason want it) then id consider the no lapse gUL preferrably a short pay period like 10 if that could be afforded.

I confirmed with my dad. He will pay yearly not monthly. He thinks his situation makes sense for whole life. I just don't know.
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Re: Whole life or term life?

Post by Jack FFR1846 »

It sounds like the salesman has convinced your dad that funding his new BMW is the right thing to do.

To give you an answer to the question you will likely ask 3 years from now....yes, it is true that if you cancel this policy, even though he has put nearly $10k into it, you won't get a cent back. The salesman's BMW payments do not offer refunds, so you are out of luck
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dhodson
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Re: Whole life or term life?

Post by dhodson »

ktd wrote:
dhodson wrote:
Theoretical wrote:The answer is neither. This is one of the situations where a permanent policy makes sense, simply because of his age, and because he has a young child to support. A whole life policy is a money pit for this use but his eligibility for term is likely to run out in the future.

What comes to mind is a universal policy structured to be almost entirely death benefit, with just enough cash value to offset the increase in premium as he gets older. This is the same kind that is used for irrevocable life insurance trusts for estate tax issues.

The other one to consider is group insurance. I'm a member of AAA and was going through some old correspondence and was surprised to find annually renewable term insurance up to age 80, with premium increases every 5 years.

That is probably NOT a good idea in this situation. No lapse gUL can be very dangerous in a situation where sufficient income isnt available to keep it in force. This person is considering paying their term monthly, thats not the same situation as a rich person with an irrevocable trust. The moment this person is even late on a payment then they will lose the no lapse guarantee and if the payment isnt immediately coughed up then the policy goes bust for zero regardless of years they have been paying. Insurance just isnt a magic bullet for a situation where someone hasnt saved properly. While i dont feel insurance beyond term is the answer (and of course i dont work in the insurance industry), if i wanted an insurance solution for this case with what has been written so far, id get an overfunded up to MEC WL blended with 1-15 years of term. IF the situation is such where the person actually has a bunch of money and there isnt risk of lapsing a policy (so really they dont need the insurance but for some reason want it) then id consider the no lapse gUL preferrably a short pay period like 10 if that could be afforded.

I confirmed with my dad. He will pay yearly not monthly. He thinks his situation makes sense for whole life. I just don't know.
likely your dad doesnt understand what he is purchasing. thats his decision in the end. IF he insists on purchasing it then have the agent show him an illustration overfunded up to MEC limits. That way at least when he surrenders it, he will get something back. It can be blended with term if a little more initial death benefit of insurance is desired.
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Re: Whole life or term life?

Post by SkierMom »

edge wrote:This may be a case where permanent life insurance makes sense. He might consider universal life. Another option is to investigate group life insurance options at his employer and understand the age limitations/conditions/underwriting. The fact of the matter is that this guy has huge liabilities that will extend beyond his likely mortality and needs to cover that risk. Unless he is wealthy - but I assume he is in a 'work till dead' mindset.

He will not be able to get term beyond a 10 year. which would leave him and his family potentially exposed.

I noticed some poster said he could invest in an index fund returning 8%. An 100% equity investment for a 55 yr old does not sound like a great idea to me.
Are you kidding? Run it with a conservative 55% equities/45% bond mix, or about a 5% return instead of 8%.

You still come out ahead.
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Re: Whole life or term life?

Post by dhodson »

The cash value certainly will come out ahead with the mixture your outlined. The death benefit depends on when you die. Agents like to pretend its likely you will die prematurely when the insurance company rates you super preferred. While thats technically possibly, if it happened very often then of course they would be out of business.
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Re: Whole life or term life?

Post by Matahari »

ktd,

You did not provide additional details, and these items may not be applicable to you, but you should make sure that your father is looking at his entire financial horizon for the next 20+ years. For example:

(1) Your Dad is 55 with a 5-year-old: he can file for SS early and obtain dependent benefits for his child until she is 19 and a full-time student. This would free up some of his funds for other things. He should not overlook this option.

(2) We do not know your Dad's other financial resources that may be available to support his widow and young child in the event of his death: if he is able to provide for them adequately while he is living and his greatest concern is for their support after his death (especially for his young child), then that IS precisely the purpose of life insurance. Then, he should look to buy the most coverage that he can at the lowest cost, while insuring against future uninsurability and rising premiums. This suggests a 20-year level term. If you go to term4sale.com, you can see that a 55-year-old man can obtain 20-year level term, barring some underwriting issues like his present health.
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Re: Whole life or term life?

Post by edge »

If he can get 20 yr term he should go for it. The underwriting is going to be challenging.
Are you kidding? Run it with a conservative 55% equities/45% bond mix, or about a 5% return instead of 8%.
See dhodson's post. In any case, trying to 'insure' using cash flow and hoping for investment returns over a short period of time is not a good strategy. This solution opens him up to severe risks in the next 10-15 years of having a very small portfolio and croaking while still having extensive liabilities.
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Re: Whole life or term life?

Post by LadyGeek »

ktd wrote:
SkierMom wrote:
He is wanting to buy whole life. His reason is: if he invests $250 a month for 30 years (when dad turns 85) at 4% annual rate of return after inflation, step mom will only get 175K. If he buys whole life, step mom will get 300K when he dies.
If your dad passes away in 15 years, your step-mom will have $300,000 + $78,000 = $378,000

If your dad passes away in 30 years (like your example above), your step-mom will have $300,000 +$315,000 = $615,000

Buy Term.
Sorry but I don't get your math.
I get different numbers. See the wiki: Comparing investments

Having a term policy of $300,000 and invest the rest ($250 / month at 4% annual interest rate):

0.33% nominal rate = NOMINAL(4%, 12)/12 <--- per month

$ 61,321.85 = FV(0.33%, 15*12,-250,0) <--- over 15 years
$171,280.57 =FV(0.33%, 30*12,-250,0) <--- over 30 years

So, your step-mom will have the term policy and additional income from the investments:

$361,321.85 = $300,000 + $61,321.85 (in 15 years)
$471,280.57 = $300,000 + $171,280.57 (in 30 years)
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Re: Whole life or term life?

Post by Dandy »

I would normally agree with term.

I recently read an article from one of the "good guys" (can't remember who or the source :oops: ) who compared buy term at a young age vs whole life paid up at 65. The gist of the article was that while the term buyer paid something like $4,000 less a year for a and had a larger investment portfolio at 65 the whole life buyer ended up with the potential to get higher income.

Assuming they were both male - the whole life buyer bought an annuity for the face amount of the Whole Life Insurance with his lesser portfolio - making it even lower. But, the annuity plus the same investment withdrawal rate, gave a higher income. Upon his death the spouse could collect the insurance and buy an annuity and continue the income advantage.

I think I have the author's conclusion correct but the details might be a bit off. Don't know of its applicability for the OP but I had never seen this approach mentioned before. Hopefully, someone else has read this recent article can produce the link to it. I would imagine if true there were two factors in play - pay more but have something of value at 65 and mortality credits with the annuity.
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Re: Whole life or term life?

Post by dhodson »

There is a thread on wade pfau article

Industry sponsored and not peer reviewed
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Re: Whole life or term life?

Post by dodecahedron »

LadyGeek wrote:
ktd wrote:
SkierMom wrote:
He is wanting to buy whole life. His reason is: if he invests $250 a month for 30 years (when dad turns 85) at 4% annual rate of return after inflation, step mom will only get 175K. If he buys whole life, step mom will get 300K when he dies.
If your dad passes away in 15 years, your step-mom will have $300,000 + $78,000 = $378,000

If your dad passes away in 30 years (like your example above), your step-mom will have $300,000 +$315,000 = $615,000

Buy Term.
Sorry but I don't get your math.
I get different numbers. See the wiki: Comparing investments

Having a term policy of $300,000 and invest the rest ($250 / month at 4% annual interest rate):

0.33% nominal rate = NOMINAL(4%, 12)/12 <--- per month

$ 61,321.85 = FV(0.33%, 15*12,-250,0) <--- over 15 years
$171,280.57 =FV(0.33%, 30*12,-250,0) <--- over 30 years

So, your step-mom will have the term policy and additional income from the investments:

$361,321.85 = $300,000 + $61,321.85 (in 15 years)
$471,280.57 = $300,000 + $171,280.57 (in 30 years)
I don't disagree with LadyGeek's math but, with the present outlook, 4% in nominal aftertax return on the investments is going to involve taking a significant amount of risk. By contrast, the life insurance death benefit proceeds will be taxfree and relatively low risk (if bought from a conservative highly rated insurance company in a state with strong insurance regulations), at least in nominal terms.
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Re: Whole life or term life?

Post by LadyGeek »

^^^ My intent was to take the mystery out of these calculations. Learning the "Time Value of Money" basics is a worthwhile concept that will provide a life-long benefit. It's not black magic that only financial professionals can do. All you need is a spreadsheet* and the ability to copy-n-paste the formulas. With some practice, the ideas will sink in and you'll get a feel for how this works.

The purpose of the post was to show the effects of compound interest. Start investing now and look how much more you will get in 15 or 30 years. Start a few years later, and you'll get a lot less. IOW, investing later might not show as significant of an advantage over the whole life policy than starting now. (I'm just looking at the math side.)

* There's no need to own Microsoft Excel. You can download a free spreadsheet program from LibreOffice. Works fine.
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ktd
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Re: Whole life or term life?

Post by ktd »

Thank you everyone. I showed my father this thread. Now its up to him.
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Re: Whole life or term life?

Post by Hikes_With_Dogs »

The Wizard wrote: Life insurance isn't necessary for everybody and especially not to retirement age...

He has a 5 year old!
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Re: Whole life or term life?

Post by dhodson »

Hikes_With_Dogs wrote:
The Wizard wrote: Life insurance isn't necessary for everybody and especially not to retirement age...

He has a 5 year old!
May still not need insurance. Keep in mind his retirement savings for two (wife and him) may be sufficient. It just all depends. Having a 5 year old isn't the only factor.
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Re: Whole life or term life?

Post by HomerJ »

Hikes_With_Dogs wrote:
The Wizard wrote: Life insurance isn't necessary for everybody and especially not to retirement age...

He has a 5 year old!
If he's retired, then they must have enough money right now to pay for him, his wife, and his 5-year old child...

If he dies, there's no change... if they have enough money saved for all 3 of them, certainly they have enough money for 2 of them

Life insurance is usually bought to replace income that the dead spouse was bringing in... If you're retired, you already have enough money.
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Re: Whole life or term life?

Post by edge »

My assumption is that he is not retired and is in a 'work till dead' situation.
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Re: Whole life or term life?

Post by Hikes_With_Dogs »

HomerJ wrote:
Hikes_With_Dogs wrote:
The Wizard wrote: Life insurance isn't necessary for everybody and especially not to retirement age...

He has a 5 year old!
If he's retired, then they must have enough money right now to pay for him, his wife, and his 5-year old child...

If he dies, there's no change... if they have enough money saved for all 3 of them, certainly they have enough money for 2 of them

Life insurance is usually bought to replace income that the dead spouse was bringing in... If you're retired, you already have enough money.
I'm making wild assumptions based on the much younger wife that he is working and lost half his life savings/retirement 6-7 years ago in the divorce... apologies if I've incorrectly guessed.
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