My wife and I are in the process of closing on a home purchase, and want to be insured in case something happens when we start paying on our mortgage. We are both healthy, 28-year-olds with no children. My father-in-law think we should purchase a whole life policy with a mortgage rider because of the cash value accumulation. But I am leaning towards two 30-year-term policies with $500,000 to $1 million coverage for both of us. Our mortgage is going to be roughly $180,000. The term insurance is a lot cheaper. Is the extra money that we’d be putting away towards the cash value in a permanent policy be better invested in either our Roth IRA, 401(k), and 529 plans, or kept as cash flow?
First, full disclosure, I am not an insurance broker, I don’t sell insurance products of any kind, and the only insurance product that I have ever purchased myself is a term policy.
My recommendation to you would be to also only consider term life insurance. Like you already are aware, it is not only cheaper, but it also separates your investments from your insurance. There is absolutely no way that an insurance/annuity firm can provide you with the diversity, quality, and cost of investment portfolios that you have the freedom to seek out yourself from Vanguard, Dimensional, and from reputable fee-only fiduciary advisors. Get your term insurance from an insurance firm or from a fee only insurance agent, then use the savings over whole/universal life to fund your retirement with a legitimate, well-diversified, low-cost investment portfolio. Generally, the more complicated a product is, whether insurance or investment, the less it makes sense. Complicated products are usually created so that financial professionals can generate more fees.
Also ask about tiered terms. By tiered I mean that you may be able to purchase smaller 10, 20, 30 year term policies so that as you get older the shorter terms drop off, leaving your with lower premiums and lower coverage (so you have the most coverage when you need it most, in middle age). Again, I am not an insurance agent, so please talk to one that can provide more info.
Finally, based on the summary of your finances and goals, that 1M policy may be a bit much. Sure, you want your family to be taken care of well in case the worst happens. However, if there is significant difference in the premiums, you may be able to better plan for your family’s future by getting the right coverage amount, then investing the cost savings in your retirement and college savings portfolios. Good luck.