Term? Whole Life? Which one to choose? This is the ultimate question when you are planning to purchase coverage to protect yourself while you are alive.
First let’s look at the differences between Term vs Whole Life insurance.
Simply put term ins is pure coverage for a set number of years. You are protecting yourself and the income that you produce for a period of time. We say protecting your income because that is what live insurance is. Your children are dependent on you for your income and if something happens to you then your income is protected with this coverage. With term the monthly premium does not fluctuate during that period of time either.
A term policy can be purchased in increments of one year to 30 years and that is generally the time period that you need life insurance for. Once your children have grown up and can support themselves there will no longer be a need to have this type of coverage if you continue to save and invest your money outside of your term policy.
The beneficiary is named on the policy (could be your spouse or other family members) and upon the death of the insured the set amount is paid out to the beneficiary.
Term policies costs much, much less than WholeLife Policies do. There is no investment portion associated with this type of assurance coverage.
This type of permanent insurance combines Term Ins and an investment together. The policy holder pays a monthly premium for the rest of his/her life. It is life insurance for the entire period the insured is living (plus an investment component).
With this type of permanent coverage you need to know that as people age the risk of death increases which makes the cost of insuring you much more expensive. If you understand this then you will realize that even if the ins agent tell you that you will pay the same each month in a permanent policy your monthly premium will start to creep up higher and higher in the future.
Different from Term, with Whole Life Ins you now have an investment component tied to your policy (under the ins co) which could be in:
Bonds / Money-market / Stocks
The monthly premium is also a set amount (that is what you are told) each month and generally more expensive than Term ins.
A portion of the funds that you are paying on a Whole Life policy will go into an investment vehicle which is the cash value portion of a permanent policy. There are a few investment vehicles to choose from with the insurer. You are able to “borrow” the money and pay it back with interest. Meaning that you can borrow for emergencies, family vacation and especially your children’s college fund is what will be told to you by your ins co agent.
Building Cash Value
The cash value investment is held within and attached directly to your policy for the duration of the policy. The first year of the policy there will be no cash value because the money that you pay the first year is used to pay the high commissions the agent receives for pushing this type of ins to his or her customers.
Life ins premiums, whether term or wholelife tend to increase much more dramatically after age 50. Keep in mind that Term Life insurance companies may not insure people over the age of 65.
As we noted before the cost to insure a person rises with age so when the policy holder gets older. Initially the policy costs will start to eat away at the cash value where the amounts will start to decrease. As soon as the cash value amount is depleted the policy holder will see higher monthly payments in the future without realizing it especially if payments area already automated to be deducted from their bank account.
Term Insurance versus Whole Life Insurance? Which one?
Term Life is much less expensive and with your savings you can put that money into any investment which you choose and control.
Wholelife is coverage plus an investment component. The investment component is marketed as “forced savings” but it is savings within a limited number of investments under the control of the live insurance company. Ask yourself would you ever have any type of investment tied to your auto ins? It just does not make any sense.
Our recommended strategy:
When getting your term policy life insurance you can calculate the difference between a term policy and a wholelife policy.
It would be wise to buy term insurance policy and invest the money that you save in any investment vehicle of your choosing whether it be in money market, bonds, mutual funds or stocks outside of ins. You will have coverage and full control of your money (you won’t need to borrow it if it was a permanent policy).