When you first start researching coverage, Term vs Whole life insurance is often the initial search. When considering life insurance, you will likely be faced with a choice: do you want term life insurance or whole life insurance? For the vast majority of people, the answer is term. Why? We’ll get into that, but before we do it’s time to learn a bit about both forms of insurance, their differences, and their similarities.
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Comparing Term vs Whole Life Insurance
The major difference between whole life insurance and term lies within the fact that term policies are life only. Once the insured passes away, the company pays a benefit to the beneficiary named in the contract. When purchasing a term plan, you’ll be able to choose your length of coverage (from 1 year to 30 years).
On the flip side of the coin, whole life insurance takes that term policy and adds an investment aspect. These investments are issued as dividends and are based on the profitability of the life insurance company and their investment portfolio. If you need to borrow money in the future, you can take it from your policy earnings.
The High Cost of Whole Life Insurance
There is a reason whole life insurance policies are more expensive than their counterparts: you’re paying for both the insurance portion and the investment component. You may be thinking that you need a good outlet for your investments, anyway, so why not do it through your life insurance plan? Well, as it happens, these really don’t provide you with the best investment bang for your buck. Not only are there better ways to save for the future than being forced to by your insurance company, you can avoid the high commissions by using more traditional investment funds.
Term Life Insurance Premiums
On the other side of the coin, term life insurance premiums are often very affordable, particularly for those in good health and those under the age of 50. Once you get within shouting distance of retirement age, of course, those premiums will start to rise dramatically. But this applies to whole life insurance as well, giving it no advantage in the competition between the two.
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That said, if you’ve waited until your elder years to buy life insurance, you may have no choice but to buy a whole life policy. Many companies are hesitant to sell term policies to applicants over the age of 75.
Any meeting between an applicant and an insurance salesman is bound to be filled with the words “cash value”. It’s important to understand, however, that a whole life insurance policy doesn’t really have any cash value beyond the face value of the policy itself.
Certainly, given enough time, it will build that value. But when combined with the high premiums involved with the policies, you’re doing little more than paying your own face value and self-insuring your investments. In rare cases (you live to 100 and your investments mature), you may get more than what you’ve been guaranteed, but this a possibility too remote to take seriously. Die before that time and your beneficiaries will receive the face value only, just as they would with a term life insurance plan. The only difference being that you paid much less for the term policy.
Is Whole Life Ever the Right Choice?
Of course, if the answer was “you should always choose term life”, insurance companies probably wouldn’t bother selling whole life policies. The truth is that there are times where whole life insurance makes sense.
If you have considerable wealth, you can leverage whole life investments into your overall estate planning strategy, setting up a trust that will use policy benefits to pay off estate taxes. Likewise, if you are starting a family later in life, whole life insurance might be worth looking into.
The problem with whole life insurance plans – even when they might be worth considering – is that it takes a financial expert to examine a policy and determine whether or not it might be a good investment. Most insurance experts agree that a whole life policy is unlikely to yield a decent ROI unless it’s held on to for at least 20 years.
If you do choose to buy a whole life plan, in other words, you may want to think about holding on to it for a while. If, however, you want affordable premiums and good coverage and you’re not interested in using your life insurance policy as a retirement plan, term life is the way to go.
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By: Michael Quinn