Life insurance agents love to argue that when it comes to term life insurance or whole life insurance, whole life is a better deal. As you’ll see shortly, they are completely wrong on this. I’m going to first explain how each of these life insurance policies work. Then we’ll discuss why term is better. Finally, I’ll show you why agents push whole life even though many already know whole life is usually a very bad choice. Life insurance cost.
The Purpose of Life Insurance
For most people, life insurance has one purpose – to make sure your family can survive your premature demise should the unexpected occur. If you have sufficient assets or you have enough passive income or your family just doesn’t rely on you to bring home the bacon anymore, you probably don’t need life insurance.
But if your family would be financially devastated by your early departure from this earthly domain, you need life insurance. (There is one other situation where you might need life insurance even if your family doesn’t need the income you provide and that’s if you are subject to estate taxes. Since that impacts so few people, we’re going to assume estate tax isn’t your main concern and that family protection is.)
And if your main concern is protecting your family, term insurance is wonderful. Whole life on the other hand is an awful solution for this. The reason? Cost.
Term insurance is extremely inexpensive as you’ll see shortly. But whole life (or permanent life insurance) is very expensive. That’s because when you buy whole life, you actually pay for term life insurance and then some. That’s right. The insurance company collects the same term life premiums but they don’t stop there.
Adult life insurance
The company collects a great deal more from you. They do this in order to put aside money to pay for future premiums. The concept is that if you give a lot more money to the insurance company, they’ll take that cash and invest it for you.
At some point, they say, the investments will be so large that the investment account will pay for your insurance and you won’t have to write a check every year. Of course the insurance company charges you huge fees for all this service and that’s why the idea fails. You could take those extra premiums and invest them yourself far better and far cheaper. Let’s look at an example to explain this a little better.
I ran a comparison for a 41 year old male who wanted to buy a $500,000 in life insurance. A 20 year term policy costs $495 a year while a whole life policy costs over $6550 a year. After 20 years, the term policy cost you a total of $9900 while you’ve shelled out over $121,000 for the whole life policy.
To be fair, the insurance company didn’t pocket that extra premium – they invested some of that money for your benefit. According to the policy, they even guarantee that the value of that money will be $144,500 in 20 years. In other words, you will make about $13,000 profit on your whole policy while your term policy actually cost you $9900. Does that mean that I’m full of it? Is whole life really better? Not by a long shot.
Remember that you could have invested that money yourself over that 20 year time period. The return the insurance company guarantees to pay you in this case is about 2% per year. That’s a very stingy return if you ask me. I realize that rates are very low right now but over 20 years you should be able to make far more than that. So why is the insurance company only paying you 2%? Because they are earning a lot more than that and keeping those profits for itself. That’s why whole life is a very bad idea.
Many times the whole life policy costs you as much as 10 times more than term life. As bad as that sounds, it gets worse. Because it’s so expensive, people buy a lot less insurance than they need so their family goes unprotected. That is the worst part of this story and it’s something I’m committed to correct.
So why do life insurance agents sell permanent life insurance?
I think you already know the answer to this question. Money. Insurance agents get a huge commission when they sell you whole life or universal life insurance. And they collect significantly less when you buy term life insurance. Insurance companies make big bucks on whole life insurance and they indoctrinate their agents to sell it. Some agents might actually believe it’s a good deal. They point to the forced savings element and the guarantees as proof but they are misguided big time as I’ve already demonstrated.
Before deciding on term or whole life make sure to speak with a qualified objective professional.
Whole or term life insurance