Whole vs. Term Life Insurance Title

Whole vs. Term Life Insurance

What is the right insurance for you? For most people the answer is clear, term life insurance. Why is that the case and what are the differences between whole and term life?

The main difference between whole vs. term life insurance is that a term policy is life insurance coverage and that's it. A whole life policy has an additional investment cash value.

Whole life insurance is a hybrid policy that combines a term policy with a variable investment piece. The investment is typically in bonds, money market securities and stocks. This policy accumulates a cash value. With both policies you pay the same fixed amount over the covered period.

Advantages and Disadvantages of Whole Life

Advantages of whole life

  • The policy accumulates a cash value that can be converted to a one-time cash payment or an annuity.
  • "Forced savings" because you are paying for insurance AND an investment with your policy. The policy is forcing you to set aside money for investment purposes.
  • The cash value of the investment portion grows tax deferred.
  • If you cancel the policy, you receive the accumulated cash or investment value. If you cancel a term policy you receive nothing because all of your premium payments were for a death benefit only.
  • You can take a loan during an emergency against your whole life insurance policy.

Disadvantages of whole life

  • The premiums for whole life are expensive and typically much, much higher than a term policy with similar death benefits.
  • Poor invesment returns. You can probably get better investment returns investing the difference between a term policy you purchase and what you would have paid for a similar whole policy.
  • They are quite expensive. The fees and commissions can take 2 to 3 percent from the annual return of the investment portion. Over time this can make a significant difference in the value of the investment. It is not uncommon for the first year of payments going entirely to commissions! That's right! A 100% fee.
  • Investment returns are hard to gauge. Not only that, you typically do not know what portion of your premium goes towards insurance and what portion goes towards your investment!

Which policy should you buy?

Of course have a financial planner look at your situation to make the final determination, but in most cases for the reasons above, term life is becoming the favored choice for most people. Wealthy people however, do have a need for whole life in some cases for their estate planning.

If you plan on having an insurance policy less than 15 years, whole life is probably not the right choice. This is because the high fees and commissions, it takes almost that long to get any worthwhile accumulated cash value in the policy! If you cancel the policy earlier than about 10 -15 years, you have wasted a ton of cash. If you cancel during the first few years (probably 5 or less) just about everything you paid out will be forfeited.

If you did purchase a whole life insurance policy and have held it for 10 years or less, does not mean you should automatically cancel it and switch to term? Maybe not. Depending on how old you are, the costs of a term policy may be pretty close to the whole policy you have because you have to physically and medically requalify. At this age, your premiums will be a great deal higher than they would have been when you were 25.

Generally, the younger you are, the less money you have, the more pressing your financial budget, term life is for you. Prudently investing the difference with the money you save with term life insurance by not buying whole life insurance will most likely outperform the investment component of a whole policy. If you are still unsure, consult a financial planner to make the final determination

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