By the time you find yourself wondering whether to use a term or a permanent product like whole life insurance, you probably are trying to make sure that someone else’s needs will be looked after, in case you die. Interestingly, the answer to that question lies with what exactly you hope to cover with the insurance.
There are short term and long term considerations, and after looking at the various benefits, structures and costs, you will recognize which type of plan that best suits all of your needs.
Let’s look briefly at each kind and their pros and cons.
What is Term Life InsuranceTerm life insurance is exactly that; it lasts for a term, a limited amount of time. There are so many variations on those term lengths. You will need to look at how long the need will last, that the beneficiary is likely to need those funds, should you die during the length of the term.
Since term life insurance lasts for a limited time, and far less than an entire lifetime, it is logical to expect that it will cost less; a lot less. A fairly recent analysis at Forbes showed that, when comparing apples to apples with similar amounts and timespan of term life and whole life policies was close to 6 times less for a term policy.
It will cost less, but will also stop covering you at the end of the term. Should you need to start a different term policy at the end of it, the cost of the premiums will change, based on your age and medical situation at that time. So think carefully about how long you may need this kind of policy, since age matters, just as with whole life insurance. You should also consider that there are term life policies that are either more or less stringent about your health history and lifestyle habits. If you have pre-existing health issues, or risky habits, you will likely have to pay more even for term life insurance.
Typically people will look for term life insurance to cover their beneficiaries’ needs (usually their family) for a specific length of time; until children are independent, and for a specific amount; to cover a mortgage (or some other financial obligation) that has a predictable end time. If you outlive the policy, the policy ends and you have no benefit from having paid those premiums.
What is Whole Life Insurance
Whole-life insurance (sometimes known as Permanent Life Insurance) will last your whole life. As stated above, whole life insurance is about 6 times more expensive in premiums than term life, and can be more, depending on your age at time of purchase.
One way to get ahead of those premiums, to make them much lower is to start very young. Many people who opt for whole life policies take advantage of the much lower rates the younger you are; starting as young as possible; even in childhood. Parents are known to get such policies for their children to help their child have a much cheaper insurance product with the benefits of a whole life term.
Since it covers an entire lifetime, starting from the date of purchase, it makes sense that it will cost more. To compensate for that extra cost, there are several benefits. First though, just as term insurance offers, the premiums will never change, even if health problems arise throughout your lifetime.
One benefit to buying such policies when you are young, is that you are far less likely to have pre-existing health issues when you buy it, keeping premiums lower. But it can also make a difference in simply obtaining a life insurance policy, before health problems are likely to have arrived.
Another benefit is the value your premiums provide. A whole life policy is an investment that pays out extra dividends (beyond the death benefit) when you die. Your policy will build value (with dividends) as each year passes, and works a bit like a savings account. It benefits those who may worry about health issues that run in families, and for those who feel that this is a better investment tool than others that are available to them.
You can also cash-out a whole life policy before you die. The amount you receive will be based on several factors in your contract; mainly on the number of years you’ve held that policy, and how those dividends accrued. Or instead of cashing out, you can borrow against this cash value.
Most models that compare the return on investment suggest that you should not use a whole-life insurance policy to get the best returns, nor necessarily the best tax advantages. It may be argued that it can be worthwhile to have a small whole policy, but that it isn’t best suited as your primary retirement portfolio, for which there are far better products and strategies.
Term Life insurance PROs
Whole Life PROs
Premiums stay the same
Premiums are the lowest at same age
Covers only what/when you need to insure
Death benefit stays the same
|Premiums provide interest/dividends||X|
Lasts your whole life, unchanged regardless of changes in your health
|You can borrow against the value of your policy||X|
|Cheaper to get policy younger/healthier||X||X|
Your decision will hinge on so many different factors, such as your age, your health, your employment, any employer-provided policies, your family responsibilities, your lifestyle, and your savings, your estate, and your retirement goals.
Although costs will appear to be a huge component of your decision-making, many other questions will need to be considered as they will impact your costs either way.
Life insurance is only one part of your financial plan
We can assist you with deciding what kind of life insurance is best for you and your financial goals. Give our office a call today to talk to one of our financial planning professionals!