Finished? The whole life? Which to choose? This is the ultimate question when you plan to purchase coverage to protect yourself while you’re alive.
First, let’s look at the differences between term life and whole life insurance.
Term Insurance:
In a nutshell, fixed terms are pure coverage for a set number of years. You are protecting yourself and the income you generate over a period of time. We say protect your income because that’s what life insurance is all about. Your children depend on you for their income and if something happens to you, your income is protected with this coverage. With term, the monthly premium also does not fluctuate during that period of time.
A term policy can be purchased in increments from one year to 30 years and that is generally the period of time you need life insurance for. Once your children are grown and able to support themselves, this type of coverage will no longer be necessary 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 stated amount is paid to the beneficiary.
Term policies cost much, much less than whole life policies. There is no investment portion associated with this type of insurance coverage.
Whole Life Coverage:
This type of permanent insurance combines Term Ins and an investment together. The policyholder pays a monthly premium for the rest of his life. It is life insurance for the entire life of the insured (plus an investment component).
With this type of permanent coverage, you should know that as people age the risk of death increases, making the cost of insuring it much more expensive. If you understand this, you’ll realize that even if the insurance agent tells you that you’ll pay the same amount each month on a permanent policy, your monthly premium will start to go higher and higher in the future.
Unlike Term, with Whole Life Ins you now have an investment component linked to your policy (under the ins co) that could be in:
Bonds / Money Market / Stocks
The monthly premium is also a fixed amount (that’s what you’re told) each month and is usually more expensive than term premiums.
A portion of the funds you are paying into a Whole Life policy will go into an investment vehicle that is the cash value portion of a permanent policy. There are a few investment vehicles to choose from with the insurer. You can “borrow” the money and pay it back with interest. Which means you can borrow for emergencies, family vacations, and especially your children’s college fund is what your co-insurance agent will tell you.
Cash value creation
The cash value investment is held within and attached directly to your policy for the life of the policy. The first year of the policy there will be no cash value because the money you pay in the first year is used to pay for the high commissions the agent receives for pushing this type of insurance to their clients.
Life insurance premiums, whether term or whole life, tend to increase much more dramatically after age 50. Keep in mind that term life insurance companies cannot insure people over the age of 65.
As we noted earlier, the cost of insuring a person increases with age, so the policyholder ages. Initially, the costs of the policy will start to eat up the cash value, where the amounts will begin to decrease. As soon as the cash value amount is depleted, the policyholder will inadvertently see higher monthly payments in the future, especially if the payments are already automated to be deducted from their bank account.
Term Insurance vs. Whole Life Insurance? Which?
Term life insurance is much less expensive, and with your savings you can put that money into any investment 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 life insurance company. Ask yourself, would you ever have any type of investment tied to your auto insurance? It just doesn’t make any sense.
Our recommended strategy:
By getting your term life insurance, you can calculate the difference between a term policy and a whole life policy.
It would be wise to purchase a term insurance policy and invest the money you save in any investment vehicle of your choice, be it the money market, bonds, mutual funds, or non-insurance stocks. You will have total coverage and control of your money (you will not need to borrow it if it were a permanent policy).