TERM LIFE vs WHOLE LIFE
Term life insurance and Whole Life insurance have been debated since their existence by financial experts and rookies alike, with both teams cheering for both products. So if the experts can’t make their mind up, how is the customer supposed to do it? Isn’t that what professionals are for after all? Well, in the end the choice is yours. Life insurance agents and financial advisors are there to explain the products, answer all your questions and recommend the best course of action. But like anything in life, the final decision is yours to make. So I’m going to use this article to tackle this debate head on, and to help you, the consumer, make an educated decision on whether you need whole life, term life, or something else.
WHAT’S THE DIFFERENCE?
The main difference is in the name, seriously, I’m being sincere. Term life is life insurance coverage for a given “term” of your life. And whole life is a life insurance coverage for your, you guessed it, WHOLE life. Now from just reading that you would think “well its obvious whole life makes more sense, right?” Not exactly. Let’s go over their major differences in detail.
LENGTH OF COVERAGE
Whole life insurance is a permanent life insurance product that will provide financial protection to your loved ones in the case of your passing as long as you maintain your premiums, usually to age 100. At which point your policy will be paid up. Term life insurance however, is not a permanent life insurance product. This is a life insurance policy that comes with an expiration date. You can attain a term life policy for 10, 20, 30 and sometimes 40 years. Once the policy is in force you pay a locked in rate for the set amount of years you pick. Once the term expires, so does the policy and you no longer have protection. Unless you renew or convert it(more on that in a bit).
This is the most discussed difference between the two policies, but, for the most part, the most irrelevant. Why? Two big reasons:
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Whole life is not the only permanent life insurance product on the market. There are much more affordable alternatives in the form of Guaranteed Universal Life Insurance policies, often called “Permanent Term.” These products don’t have a strong investment aspect as Whole Life(more on that in a bit) but they do offer permanent protection to old age. Often to age 100 or 121 before they expire, which is why they are called permanent term. If you live longer than that don’t be bummed, you’re breaking world records.
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Term Life Insurance can be converted to a permanent product, on a guaranteed basis. This means that you can convert your term life insurance policy to a permanent life insurance once the policy expires or prior to age 65(70 in some cases). You also would not have to prove good health. For example, let’s say Joe got a 20 year life insurance policy at a very healthy rate at 35 years of age. Now 20 years pass and his policy is due to expire and unfortunately he was diagnosed with type 1 diabetes in the interim. Normally a diabetic would get rated up or declined for coverage. But because Joe is going to exercise the conversion privilege that comes with a good Term Life policy, he will get permanent coverage in place at the same health class as when he was 35. The only thing that would be adjusted is his rate for his new age of 55. You can also renew the coverage annually but that can get too expensive over time.
CASH VALUE
The second major difference is the world famous “cash value accumulation.” Whole life insurance is a life insurance policy that comes with an investment aspect that uses a portion of your premiums that accrue the cash value over the years of the policy. The more time goes by the more cash value your policy accumulates and you will be able to “borrow” funds against the policy. The borrow is quoted because technically it’s a loan. According to most financial advisors this is a GREAT investment. I say this is a GREAT investment if: you’re rich, you’re not considered as part of the middle class, you don’t actually need life insurance, and you “maximized all your good investments,” which, if you ask me, you can never really maximize a good investment can you? It’s just something cool term life insurance agents have learned to say to avoid bashing whole life all together. This is because there are some very rare instances where whole life can make sense, very rare. Term life insurance, does not carry cash value accumulation, it’s simply a pure death protection life insurance product.
COST
Here’s where it becomes easy to determine if you’re the type of consumer who needs Term Life or Whole Life. If this heading was irrelevant to you because cost is no thing in your life, then whole life may be for you. But if you have a legitimate fear that your financial dependents would be devastated if you passed and you need an adequate coverage amount in the coming years to secure your loved ones at an affordable rate, then term life insurance is for you. Whole life can be as much as 10 times the cost of a term life policy, for the same exact amount of coverage. This is due to the many fees associated with a whole life product and largely due to the cash value accumulation. However, I always stress that life insurance should be attained with the assumption that you can pass away at any time, so you should focus more on protection rather than investing if your death is a financial disaster to your family. Besides, there’s a lot of investing you can do with the money you save if that is your desire(more on that in a bit).
TERM LIFE INSURANCE PROS AND CONS
Like any product, from smart phones to broomsticks, all products come with their share of pros and cons, term life insurance is no exclusion.
THE GOOD THINGS
For the most part it’s fairly obvious what term has to offer as a product: it’s affordable, it’s simple, and it can be turned to a permanent policy without having to prove good health.
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Affordability – term life insurance is hands down the most affordable product on the market. It’s designed to protect you during the most pivotal years of your life. This includes things like paying a mortgage, kids you’d like to attend college, and income replacement for your dependents. These are viewed as temporary financial responsibilities and term is best at the point in life where life insurance is obviously detrimental. But why is it so affordable? Because this is “if” you die coverage, where as permanent life insurance is more “when” you die coverage. So its possible that you die, its just not likely, and based on that you get affordable rates. The higher chance of you dying, the higher your rate for life insurance. How affordable is it? Well a healthy 35 year old male who doest smoke can get $500,000 worth of coverage, for 20 years, for $31 a month. Thats about a dollar a day.
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It’s Simple – this isn’t too much to celebrate but it is a pro nonetheless. For people who don’t want to hear about cash value, tax advantages and potential gains, term life insurance is a perfect, pure protection, life insurance product. If all you want to know is what your family will receive when you die and what you need to pay for it, term life provides that simplicity.
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Convertible – that’s right, let the top down and enjoy the sun up, because term life insurance comes with a convertible option. As mentioned earlier this means that at the policies expiration you can turn it into a permanent life insurance product. Even if you paid off your mortgage and your kids are all grown up, you can still convert and lower the coverage amount to your now lesser need for life insurance and leave it to cover any final expenses that maybe associated with your death down the line. This way the age adjustment doesn’t skyrocket your rates. The option to convert usually comes as an add on to the policy at NO extra cost. Most financial advisors frown on term life agents that sell term life policies without this option, and rightfully so. To avoid this always make sure the product you’re being offered contains this option. If not, run from that agent.
THE DOWNFALLS
So that was the good stuff, let’s talk about the not so good stuff.
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It Expires – a lot like that milk in your fridge that went bad when you went gluten free for that one month and stopped eating cereal, term life insurance policies expire. While the convertible option is a fix to this problem, there is no changing the fact that there will in fact be an increase in premium at the end of the policy to adjust to your new, older, more senile age. Of course you may not need as much coverage, but still, it does expire. Also, if you already have a term life policy in place and worked with a rookie agent, then you may lack the convertible option. In which case this would be a huge downfall of that particular product.
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Has Cash, Has Value, but Doesn’t have Cash Value – don’t expect your term life insurance policy to come with an investment aspect. That’s what whole life insurance is for. The benefits that come with term life insurance are locked in rates and some living benefits like the Accelerated Death Benefit Rider.
No that’s just about it for the pros and cons of term life insurance, so, whats good and bad with whole life insurance? Let’s get into it.
WHOLE LIFE INSURANCE PROS AND CONS
So we talked up term and talked it down a little, let’s talk about Whole Life Insurance. The good, the bad, and the ugly of this cash value accumulating, tax sheltering, permanent protection, life insurance insurance policy.
THE GOOD THINGS
The best things about whole life insurance are not for everyone. But let’s talk about what makes this a good product.
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It is truly for your whole life – given that you can pay your bills consistently and on time, whole life Insurance is a product designed to provide life insurance protection for your entire life. This means no expiration dates at any point. Most whole life Policies mature at age 100. This means that the cash value accumulation equals the death benefit and now your death benefit is yours to do with as you please. The premium will also remain level throughout the whole policy.
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Has Cash Value Accumulation – even though whole life is super expensive because of this, it does come with an investment aspect called cash value accumulation. This can make sense for someone doing estate planning, or can pay up the whole policy up front to reap the benefits of the interest earned on premium sooner rather than later. The cash value is considered a tax sheltered investment.
CONS
The cons for whole life come from the fact that it isn’t for the average folk that are part of the middle to lower middle class.
1. It’s Expensive – now while “expensive” may be relative, let’s illustrate the difference in cost between whole and term life. Let’s run a quote for a $250,000 whole life and term life policy with Sagicor for a 35 year old male at a Preferred health rating. Here are the results.
Whole life – $256 a month
10 year term – $20 a month
20 year term – $27 a month
Now you can see why a many agents advise that you “buy term and invest the rest.” That’s a huge difference in premium and if cost is an issue it’s better to focus on adequate life insurance coverage rather then lure of investment. Keep in mind both of the term life insurance policies above are convertible policies.
2. Not the best investment – when it comes to whole life as an investment its a great way out for someone who doesn’t want to take a little time to learn about other investment options. But if you’re serious about investing a whole life insurance policy should be your last resort because historically their returns are much lower than most investments out there. Once again, its a very particular type of client who benefits from this type of life insurance, and its usually not the type of client who absolutely needs life insurance.
WHOLE LIFE: NOT ALWAYS A GREAT INVESTMENT
From a perspective of obtaining insurance and an investment, whole life does not make a lot of sense for an investment opportunity or service as life insurance. Many people don’t need coverage for their entire life and if they do there are more affordable options without the investment portion, but yet that continues to be what draws people in to purchase whole life. However, there are much better options available if investment is what you’re seeking. Here’s why:
Illustrated whole life returns are not guaranteed, whole life insurance is not diversified, and positive returns in a whole life insurance policy take a long time to actually come to fruition. An advisor trying to sell you a whole life policy may paint the potential for return as rather large, the reality is that policies held for 40 years or so will have returns of around 4%(a lot less if you try to cash out earlier). Although this may not seem like a generally bad return, a 10-year treasury bond will return 5.4% historically. Which is good, but even still, not the best ROI out there. In comparison to most investments, the whole life insurance investment component just doesn’t measure up.
An investment in stocks or real estate will depend on many different factors but over the course of several decades, you could be looking at potential returns between the 7% and 12% range. When comparing these various options such as real estate, stocks and treasury bonds, you can see that whole life insurance doesn’t make much sense as an investment.
Advisors who may be attempting to sell you a whole life policy will show you projections of possible returns but you should never count on these as guaranteed. They’re frequently presented in the most positive light possible to entice you to purchase the policy. Don’t get me wrong, I’m not saying all advisors are out for themselves, some of them have just been taught that this is the way to go. So the best thing to do is to sit down, do the math and the research yourself and THEN go find a professional to work with. In the end, if investment is your bottom line, there are other routes you can take that provide better returns that come without the expensive premiums and high fees associated with a whole life insurance policy. In my humble opinion, your money is better finding it’s way to a term policy followed by index funds, REITS, bonds, etc
Source: insurechance.com