Term Insurance vs Whole Life: Everything You Need to Know
In this article, I'll discuss term insurance vs. whole life insurance.
I originally bought term insurance because I thought it was a more affordable product. I did more research and I’m going to share what I’ve found.
Table of Contents
How Does Life Insurance Work?
Like other types of insurance, life insurance eases the financial burden when things take a turn for the worse: the death of the person who’s insured. After the claim is submitted to the insurance company, the money is paid out to the people who are listed as beneficiaries.
Unfortunately many people avoid buying life insurance because they get no personal benefit from it, like you do with car or auto insurance.
While that’s true, you have to think about your dependents. No amount of money will bring back a person’s spouse, but financial support will be greatly needed in the months or years to come. Keep in mind that this money is not for you; it’s for the well-being of your family.
Another reason people put off buying life insurance is because they feel that by getting a policy, they’re tempting fate. What they fail to consider is that this line of thought is selfish. No matter when we die, we leave behind loved ones.
None of us have an idea when our time is up. It may happen when we’re young and single; or when we have a partner and three kids; or when we’re 90 and have lived a nice, long life.
If you have anyone depending on you for some or part of their life and you don’t have sufficient amount of financial assets, you should have life insurance.
How Do Life Insurance Actuarial Tables Work?
The term actuarial table sounds quite sophisticated, but it’s simply a chart that shows, based on current statistics, the chance of the person passing away before their next birthday, and the number of years that a person has left to live. These charts help life insurance companies determine the policy costs for clients. For example, a 30-year-old man can expect to live another 47 years, while a woman of the same age will live 52 years. His premiums will be slightly higher than hers because statistically, he’ll die before she does.
The younger a person is when they start paying into a policy, the cheaper it is per year because there’s a lower chance that the company will have to pay out. On the flip side, a 55-year-old will pay much more than a 25-year-old because there’s a much higher chance of the older person passing, and the company needing to pay out sooner.
A major difference in term vs whole life insurance is that term insurance rates are lower because most people outlive their term policies. This means that the insurance company has collected premiums for 10, 15 or 20 years and in the end never had to settle a claim. Those who choose to get a new term policy will pay considerably more because their life expectancy is now shorter, and the provider has a greater chance of needing to make a payout on the policy.
What’s the Difference Between Permanent and Temporary Insurance?
Whole life insurance is permanent life insurance. With this you have coverage for the rest of your life, provided you keep the policy in place by paying your premiums. You have set premiums for life, and even if you develop a serious disease 20 years into your policy, you’ll still have coverage. It also has a savings component which builds cash value after a few years of having the policy. This allows you to take an interest-free loan whenever you need some quick cash. Permanent insurance is more expensive than temporary insurance because of these extra benefits.
Term life insurance is a temporary policy; it’s only good for a certain number of years, often between 10 and 30 years. Once a term life insurance policy expires, you can decide if you want to get a new one or not. When you apply for a new policy, it’s important to remember that you’re now older and may have some health conditions which were grandfathered in to the old policy, but will cause your new one to have higher premiums. Term life is best if you think you won’t need or want life insurance once the term is over.
The 6 Benefits of Whole Life Insurance
Whole life insurance offers more benefits than term policies.
Six of these benefits are:
Once you have a whole life policy in place, you have guaranteed coverage for life. Since it never expires you have no need to worry about losing coverage later on in life.
Most whole life insurance policies are set up so that you have a fixed payment. This means you can budget for it whether you pay monthly or annually. Universal life policies are an exception and you can adjust the premium and payout amount as necessary.
Builds Cash Value
Unlike term life insurance, in which you get nothing at the end of the term, whole life policies will build up a cash value. This means that if you ever come short and need some cash, you can borrow from the policy.
Fund Business or Retirement with the Cash Value
One way to make whole life insurance policies work for you is to practice the Infinite Banking Concept (IBC) to fund your business, retirement, or any other purchases you want to make.
Upon your passing, the money that your beneficiaries receive will be inherited tax-free. This is a great way to leave in inheritance to your heirs without them losing part of it to Uncle Sam.
You Can Become Your Own Banker
One overlooked benefit of having a whole life insurance policy is that you can use it to practice the Infinite Banking Concept (IBC). To do this, you fund your policy more heavily in the first years. This allows the cash value to build up sooner and earn more interest. Then you can borrow against it as you like.
Let’s say you fund it for five years and now have $10,000 available. You decide to take out $9000 for your car purchase. This money is free and clear. No need to pay a bank interest. Even better is that for the five years prior, your money was earning interest, as does the remaining $1000. Unlike investing in the stock market, there’s little risk of losing your money.
The biggest drawback to IBC, is that if you over-fund your policy you could be subject to taxes. This is dependent on the earnings, and is controllable with the help of your insurance professional.
Life Insurance Gets More Expensive the Longer You Wait to Get A Policy
It’s almost always better to buy life insurance earlier than later. The exception is when you have a health condition that would impact your ability to get a policy. As medicine advances, and more people overcome and survive diseases like cancer, it’s possible to get a policy a once you’ve been in remission for several years.
That said, if you’re healthy, you want life insurance now. Then you are covered if any health issues come your way. You don’t have to look far to find a story of a young mom or dad widowed, and with no life insurance to help pay the bills. And if you’re interested in becoming your own banker, it’s also best to start now so that you can get the most use out of it over your lifetime, and reduce interest and fees that you pay to the bank.
Charles is the founder of infoSpike.com. He enjoys real estate investing, marketing, and personal finance. Read more about Charles here.