Whole vs Term Life Insurance
When you start to get seroius about getting life insurance you will usually hear about 2: Term life insurance and Whole life.
JP and I stay away from Whole Life. JP and I each have 2 term life insurance plans. We will acquire more life insurance when our annual income increases. You will not see me purchase or recommend whole life insurance ever. I will still tell you everything about it and you can make your own decisions on it. I would recommend that if you do have it, get rid of it after you have Term Life Insurance in place. If you have not checked out my other post on life insurance, you should check it out.
Term Life Insurance
Term Life Insurance provides coverage for a specific period of time and is designed to protect your dependents in case you die. When you begin your search for Term Life Insurance you will find different ones with different time term limits. You could buy a 15 year, 30 year, etc, it is up to you what time period you choose on your policy. If you have term life insurance when you die, the policy pays out to your dependents upon your death. There is no other value to term life. It is as simple as that.
Term Life Insurance is significantly lower in costs compared to whole life. When your term policy ends, you then choose a new coverage for your term life if you need it. For example, I purchased a 30 year policy at age 30, so when I turn 60, I will need to decide if I even need a new policy, I probably will not. But if I did, the price for Term Life would not be as low due to my age and if I have any health issues. If you plan your financial life right, you won't need it at age 60.
Whole Life Insurance
Whole Life Insurance is meant to be in place for your entire life at premiums that will not increase, as long as you make the required payments. Your payments are split into three areas: cash value, death benefit and operating costs. 1/3 of the premium is gone to the insurance company, see ya later.
When you sign up for a whole life insurance plan, you will sit down with your insurance sales person and determine your death benefit amount. The death benefit amount is guaranteed just like term life. One of the "benefits" to whole life is the cash value. The cash value is an investment amount that is part of your premium you paid that goes towards this. It is guaranteed to grow at a constant rate and is tax deferred. You can even borrow against your cash value or surrender your policy for the cash amount. If you choose to surrender your policy for the cash amount, you will cancel your policy and they will send you only a portion of your cash value. If you choose to borrow against the cash value, you must make payments with interest and if you do not make the payments you will lower your death benefit. If you borrow against the cash value and then die, your death benefit will lower as well to cover the loan.
Whole life is also much more expensive than Term Life. When I say much more, I mean five to fifteen times more expensive. This alone should stop you from buying it. Not only that, but the cash value that is invested and guaranteed to grow is growing at an average of 1.5% according to consumer reports. You could just open an online bank account and earn almost that much, if not that much.
So let's break this down some more. You have a whole life policy, you have a cash value amount you have never touched but then you die before your cash value hits maturity. You know what happens then? You lose it. Your dependent receives their death benefit and the insurance company has now run off with 2/3 of your premiums.
If you had instead gotten a Term life insurance plan for a fraction of the cost, you could have then invested the remaining amount of a whole life policy and made way more money than what you ended up with. For example, one of my policies is for $500K and it costs annually $340, let's round down to $28/month. Let's say I also got a whole life policy. Nerdwallet shows that a female, 30 year old (which is when I purchased this policy) has an average whole life policy of $3,753. If I took that $284.75 difference and invested it instead and made an average of 7% over 30 years, I would have over $333,000. If you took the 1/3 amount of the $312.75 and invested that over 30 years in 1.5% interest, I would have roughly $122,000. I also lost the $16,800 to the operating costs and the other amount goes towards my death benefit. Then you die unexpectedly, lose your cash value and end up with an overpriced death benefit. You could have instead a $500K term policy plus $333,000.
In the end, term life is best. There is a group of people who do rely on whole life insurance, and that is the group that is not qualified for term life. This is usually due to preexisting health conditions. If you are in this group, then you should get whole life insurance. You should also look into the other types of insurance. I only went over whole life and term life because those are often the most popular choices.
If you currently have a whole life insurance policy, I recommend signing up for a term life insurance policy and then canceling your whole life. Stop wasting your money on overpriced insurance.
Do your research, decide what is best for you and get life insurance today, quit putting it off. Comment and subscribe.
Term Life Insurance
Term Life Insurance provides coverage for a specific period of time and is designed to protect your dependents in case you die. When you begin your search for Term Life Insurance you will find different ones with different time term limits. You could buy a 15 year, 30 year, etc, it is up to you what time period you choose on your policy. If you have term life insurance when you die, the policy pays out to your dependents upon your death. There is no other value to term life. It is as simple as that.
Term Life Insurance is significantly lower in costs compared to whole life. When your term policy ends, you then choose a new coverage for your term life if you need it. For example, I purchased a 30 year policy at age 30, so when I turn 60, I will need to decide if I even need a new policy, I probably will not. But if I did, the price for Term Life would not be as low due to my age and if I have any health issues. If you plan your financial life right, you won't need it at age 60.
Whole Life Insurance
Whole Life Insurance is meant to be in place for your entire life at premiums that will not increase, as long as you make the required payments. Your payments are split into three areas: cash value, death benefit and operating costs. 1/3 of the premium is gone to the insurance company, see ya later.
When you sign up for a whole life insurance plan, you will sit down with your insurance sales person and determine your death benefit amount. The death benefit amount is guaranteed just like term life. One of the "benefits" to whole life is the cash value. The cash value is an investment amount that is part of your premium you paid that goes towards this. It is guaranteed to grow at a constant rate and is tax deferred. You can even borrow against your cash value or surrender your policy for the cash amount. If you choose to surrender your policy for the cash amount, you will cancel your policy and they will send you only a portion of your cash value. If you choose to borrow against the cash value, you must make payments with interest and if you do not make the payments you will lower your death benefit. If you borrow against the cash value and then die, your death benefit will lower as well to cover the loan.
Whole life is also much more expensive than Term Life. When I say much more, I mean five to fifteen times more expensive. This alone should stop you from buying it. Not only that, but the cash value that is invested and guaranteed to grow is growing at an average of 1.5% according to consumer reports. You could just open an online bank account and earn almost that much, if not that much.
So let's break this down some more. You have a whole life policy, you have a cash value amount you have never touched but then you die before your cash value hits maturity. You know what happens then? You lose it. Your dependent receives their death benefit and the insurance company has now run off with 2/3 of your premiums.
If you had instead gotten a Term life insurance plan for a fraction of the cost, you could have then invested the remaining amount of a whole life policy and made way more money than what you ended up with. For example, one of my policies is for $500K and it costs annually $340, let's round down to $28/month. Let's say I also got a whole life policy. Nerdwallet shows that a female, 30 year old (which is when I purchased this policy) has an average whole life policy of $3,753. If I took that $284.75 difference and invested it instead and made an average of 7% over 30 years, I would have over $333,000. If you took the 1/3 amount of the $312.75 and invested that over 30 years in 1.5% interest, I would have roughly $122,000. I also lost the $16,800 to the operating costs and the other amount goes towards my death benefit. Then you die unexpectedly, lose your cash value and end up with an overpriced death benefit. You could have instead a $500K term policy plus $333,000.
In the end, term life is best. There is a group of people who do rely on whole life insurance, and that is the group that is not qualified for term life. This is usually due to preexisting health conditions. If you are in this group, then you should get whole life insurance. You should also look into the other types of insurance. I only went over whole life and term life because those are often the most popular choices.
If you currently have a whole life insurance policy, I recommend signing up for a term life insurance policy and then canceling your whole life. Stop wasting your money on overpriced insurance.
Do your research, decide what is best for you and get life insurance today, quit putting it off. Comment and subscribe.
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