Author: Emily
When it comes to protecting your family against the unthinkable, you have a choice between selecting many different types of life insurance. Two of the main types include Whole Life Insurance and Term Life Insurance. An insurance agent will be happy to sell you either type. After you read this article, you will know which type is better for you and which type is better for the insurance company. Before there is any life-changing crisis and the need for life insurance presents itself, it would be smart to become as informed as possible on these two types of life insurance.
What is Term Life Insurance?
In contrast to Whole Life, Term Insurance is strictly insurance. All of the money from your premium (less the obligatory fees for administering the program) goes directly toward insurance protection. Term life can have anywhere from a 1 to 30 year term. As long as you keep the policy in force, your coverage is in effect until the term expires. For example a 10 year term life policy will pay if you die within the 10 year term. If you do not renew or make other arrangements, once the 10 years are up, you are no longer covered.
What is Whole Life Insurance?
Whole life insurance has two components to it. An insurance component and an investment component. In a whole life policy, a portion of the premium is invested, building cash value as the policy matures. You will pay considerably more for a whole life policy as compared to Term Life. Depending upon their philosophy (life insurance companies tend to be conservative) the insurance company may buy money market funds, bonds or stocks. You can borrow against the cash value that accumulates over the years. Your monthly premium remains the same throughout the life of the policy. As long as you continue to pay your premiums, the policy stays in force regardless of any changes in your health.
Whole Life insurance policies can be either non-participating or participating. The greater majority of new Whole Life policies being written today are participating policies, which simply means that they have the flexibility to use the investment earnings in a variety of ways. Earnings (dividends) can be “spent” on increasing the cash value of the policy or decreasing the monthly premiums.
People who are conservative with their money and want reassurance that they are protected for life, might consider purchasing a whole life policy.
Cost of Term Versus Whole Life
In the final analysis, choosing one type of policy over the other comes down to cost. There is little argument that Whole Life is more expensive and you can get much better coverage for the same money with Term Insurance. Up front fees with Whole Life can take 2% or 3% right off the top. Lofty commissions charged by insurance agents will set you back further. Finally, the opportunity cost of entrusting a significant portion of your premium to management (Insurance Company) that has a historically poor record of performance, can be the biggest cost of all.
Suppose your monthly premium for a Whole Life policy was $300.00 per month of which $50.00 went towards insurance and $250.00 went toward investments. That totals $3,000.00 per year of investment money. Multiply that by years of paying premiums and you’re talking about a large amount of money. Conservative investments favored by insurance companies migh give you an average return of 2% -3%. You, the owner of the policy, have no control over how the money is invested.
If however, you were to invest that stash of money through a financial institution that is designed to maximize returns, and they perform with the market averages, you’d likely earn at least 7%-8%, over the extended period of time until the Whole Life policy was paid up. That can translate in to thousands if not tens of thousands of dollars of earnings lost by holding on to a Whole Life policy.
The amount of coverage one can get with Term Life versus Whole life, is dramatic. For around $50.00 per month or less, a healthy individual around 40 can get a million dollars of protection. For that same $50.00 per month, you would be lucky to get $100,000 of insurance protection.
The reason behind the huge discrepancy has been touched on before. Term life is insurance. Life insurance companies, using all sorts of statistics and actuarial tables, assign a risk for each individual in calculating
insurance rates. With Whole Life, an undisclosed portion of your total premium goes toward the investments made by the insurer. Management fees and who knows what else, is diverted away from the insurance aspect of the policy, resulting in less insurance coverage for greatly higher premiums.
When to Consider Term Life Insurance
Anytime you are looking for pure insurance, you will get more for your money by buying term insurance. If you have young children and want to protect them while they are still under your care and control, you might consider taking out a Term Life insurance policy. A 20 year, level premium Term policy will provide protection until they graduate from college and set out on their own.
Buying insurance for a focused purpose makes sense. Buying insurance with the goal of saving for your future (Whole Insurance) does not. If you want to invest for your future, set up an IRA and invest your money in diverse, quality mutual funds. If you want a little more aggressive approach you can buy or sell stocks, invest in gold or any number of available financial products. The point here being you have ownership and control of your investments.
When to Consider Buying Whole Life Insurance
When health or age reasons make it impossible to buy Term insurance, you can consider buying Whole Life. If you have an imminent need for coverage for what was an unforeseen development, you may benefit by having some coverage, albeit at a high premium.
Shop Around When Buying Term Life
Competition by all the major insurers to sell you a term life policy has caused a great deal of discrepancy in the price you may pay for Term Life. Going online, you might find the exact coverage priced in a range that differs by several hundred dollars.
To be sure, there is a need for life insurance. Planning ahead, you can put in place a policy that will insure your family can maintain their accustomed lifestyle upon your demise. Now that you know the features of Whole Life and Term Life, you can make an intelligent decision on the right policy for you.
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