Whole Life Insurance Or Term Life Insurance: Which Is Right For You?
What's better, term life insurance or whole life insurance? Which one should you buy? This post will try to answer that question and then some.
First off, let me ask you a couple more questions. Are you insurable for medical reasons (even if only for your spouse)? Do you have enough savings that the death of either spouse would not adversely affect the children’s financial well-being? Do you work in an occupation where accidents are common? If yes to all three, then I recommend immediate purchase of a term life insurance policy. If not, get whole life instead.
One of the things I hear a lot from people about term life is, “I don’t want to give up the money I put into the policy for all those years.” People say this about cash value policies too. The thing is, if the reason you buy life insurance is for a lump sum payout, you are probably doing it for the wrong reasons. Life insurance should be bought to cover funeral costs, pay off debts and provide an income stream to your spouse and children if something happens to you. If that’s your main purpose in buying life insurance and there are no medical reasons why you can’t get coverage, then go with term.
What is covered under a whole life policy?
So why all the fuss about purchasing term over whole life? Is there any real difference between the two? Yes, there’s a difference. For starters, a whole life policy doesn’t have a cash surrender value. With a cash surrender value you can accumulate money in the policy and take it out when needed. That way you can control your insurance costs and have more flexibility in making changes. A whole life policy also provides an investment benefit of up to 7% on your investment each year, whether or not you use the cash value portion of your policy.
However, there are also some things that make a whole life policy more expensive than term.
The first thing is the premium. The premium for a whole life policy is always slightly higher than a comparable term policy. Even though it may be relatively cheap to pay the premiums on term, you're still paying for an extended period of coverage. Plus, when your policy gets up to 75% of its total face amount, you don’t have any protection from inflation or investment losses.
The second thing is the death benefit. In an actual death, the person with the higher cash value policy gets everything. The person with the whole life policy gets a death benefit, but in most cases that value is less than what he/she would get from a term life policy or a transfer of entire cash value.
As you can see, whole life policies are designed to help you keep your money put away for a longer period of time while term policies are designed to provide income and protection in the case of illness or injury to you or one of your family members. I recommend sticking with term if you have reasonable medical problems that would be covered by it. If not, you'll probably be better off with whole life.
Whole Life Policy Repayment
A 3% mortality rate is used to determine how much money you need for your insurance needs each year. Many times people over estimate their net worth and as a result purchase more insurance than they really need. If this is you, you should seriously consider repaying the amount of your policy each year until it reaches the proper premium under the 3% rule . The savings in premium will be phenomenal! This will allow you to keep more of the money in your account instead of giving it away to an insurance company. Remember, cash value is not there for investment purposes but to provide income when needed.
Whole Life Insurance Vs. Term Life
So how do you figure out whether whole life insurance is really for you or not? Here are some things to think about:
1. Federal Benefits: Under federal law, the death benefit amount paid to your survivors is limited to the cash value portion of your policy under a term life insurance policy up to $175,000 (per person). With a whole life policy, it’s unlimited. If you want more than $175,000 coverage and prefer that type of coverage over term, then whole life could be more appropriate for you.
2. Health of Spouse/Children: Generally whole life insurance protects the insured’s family from both death and disability. Term does not. However, term life can protect family from death but does not provide any protection against disability.
3. Investment Option: A whole life policy offers an investment benefit of usually 7% per year, while term usually offers 6 or 6.5%. So a $10,000 investment in a whole life policy over 10 years will probably end up being worth $13,000 when you cash it out assuming no change in interest rates over the time period. Term will be worth at least the $10,000 you put into it, plus 6.5% annual interest.
4. Flexibility: Unlike a term life policy, there is no cash surrender value in a whole life policy. If you need additional money from your term policy and it happens to be of decent size, you can take the cash out and replace it with another term policy later on, or simply let it lapse and continue to keep the death benefit for your family in case anything ever happens to you. Both options are not available to most people with a whole life policy since they usually have no cash value at all and are thus non-cancellable once issued by an insurance company.
5. Death Benefit: With a whole life policy there is no limit to the amount of coverage you will receive in case of your death. Term life does have a limit of $175,000, but typically does not provide you with a death benefit at all. Depending on the type of term policy that you purchase, that death benefit amount may be covered by your premiums instead and you won’t be able to access it until your policy is up and running for at least five years.
6. Premiums: How much it costs to buy whole life insurance depends on how long you want the coverage for.