Whole Life Insurance vs. Term Insurance
Updated: Jul 22, 2018
Life insurance can be a confusing topic, so budgeting expert and financial advisor shares a comparison on term life insurance versus while life insurance.
One particular topic that many people find is confusing is Whole Life versus Term Insurance. In this blog, I will explain the differences to you so you can make better informed decisions.
Term Life Insurance
This one is the simpler one to understand. Term Life Insurance is when you pay a monthly premium for a specified term or time period (usually around 20 or 30 years). If you die within that term, the insurer will pay your survivors a monetary benefit. Term Life Insurance is like car insurance, however: if you stop paying your premiums, you lose the insurance. It also requires a set amount of time for its duration and places a definite number on the benefits paid out upon your death.
Whole Life Insurance
This is a permanent life insurance policy. It provides lifelong coverage and includes an investment component known as the policy’s “cash value.” The cash value grows slowly and is tax-deferred (meaning you do not pay taxes on its gains while they’re accumulating). The biggest downfall of Whole Life Insurance is that it is much more expensive than a Term Life Insurance policy.
To illustrate this, I did a comparison myself. I am 36 years old. For me to obtain Term Life Insurance with a benefit payment of one million dollars, I would pay approximately $165 per month, whereas for a Whole Life Insurance policy with the same benefit level, I would pay over $1,000 per month. That is the biggest issue with choosing Whole Life Insurance.
To further compare these two policies, let’s run a few numbers. If you take the difference in what you would be paying in Whole Life vs Term Insurance and invest the difference, then you could really see a new level of benefits opening up to you. Let’s say that you purchase a Term Insurance policy and then invest the $840 you saved from not buying Whole Life into a very conservative mutual fund. The s and p over the last 100 years has averaged 10 percent a year. (Past performance is not indicative of future results). So, by taking your $840 and investing it into the market – even at earning a measly 8 percent over 30 years – you have 1.3 million dollars in the end.
This is in addition to your benefits from the Term Insurance policy itself! (Go ahead. Check my math.) If you have a Whole Life Policy, you will only have the million dollars death benefits and none of the cash value (as discussed above, it does not “pay” to utilize a loan from your cash benefits policy). If you die after having the policy for 20 years, your spouse will receive one million dollars (minus any “borrowing and interest” you may have done in the meantime). With Term Life Insurance, upon death, your spouse would receive one million dollars PLUS whatever you invested and saved on the side from the premium differences. (At 20 years, this would be over 500k.)
For these reasons, I personally recommend choosing Term Insurance over Whole Life Insurance policies. But if you do, make sure you are disciplined to save the premium difference so that you have the money in a savings or retirement fund to supplement once your policy expires.
As an added note: never invest in anything that you do not understand or that someone scared you into purchasing. I would recommend contacting a financial advisor who has fiduciary standards to assist with your financial matters. More Reading for you: Is Life Insurance a Smart Investment?