Here we go! The age old battle between term life vs whole life. Throughout history financial experts have argued over which type of coverage is superior. One faction screams, “Buy term and invest the rest!” or “Whole life is a bad investment!” Whole term life insurance quotes.
The sad reality is, many in both the financial market and insurance market have embraced the idea that the only life insurance worth it is term life. But is there another side of the story?
Our goal in this article is to help dispel the lies and misinformation as we attempt to demystify the misguided argument between term life vs whole life insurance.
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Difference Between Term and Whole Life Insurance
Before we launch into discussing which is better, whole life vs term life, we need to define what both are, as well as point out some pros and cons of term and whole life.
Whole Life Insurance
As perhaps one of the most popular types of permanent life insurance, whole life, also known as ordinary life insurance, is a policy that provides lifelong coverage and will only come to an end after the death of the insured. When death occurs, the death benefit will be paid out to the beneficiary, generally in a lump sum payment.
However, with whole life insurance, there is also a second side which is cash value accumulation in the policy. Over time, this amount will grow and you can even borrow money against the cash value tax free.
Being able to borrow from the carrier at anytime using your cash value as collateral is a game changer. If you are not familiar with the infinite banking concept ®, bookmark your spot in this article and take a moment to familiarize yourself.
Whole Life Insurance comes with Four Fantastic Guarantees
Throughout the life of the policy the premium is guaranteed to remain exactly the same. Different whole life policies offer varying lengths of time to pay into the policy, including limited pay life insurance. Some options are 10 Pay, 20 Pay, Life Paid Up at age 65 or 65 Life, and Life Paid Up at age 100 or 100 Life.
Our recommended companies offer a guaranteed interest rate return on the cash value in the policy. Currently the guaranteed interest rate is 4%, which does not include potential growth through life insurance dividend payments.
The cash value in the policy grows with compound interest. The cash value grows due to the guaranteed interest rate credited by the insurance carrier and also through dividends paid in participating whole life policies.
As a side note, consider purchasing a participating whole life insurance for your children. The policy premiums will be low and the policy will make an excellent resource for your kids, especially if you teach them how to maximize the policy via strategic self banking.
The death benefit will always be guaranteed assuming that the premium payments are made. On a properly structured policy the death benefit will actually INCREASE as you age. Think about this for a moment, as you get closer to death your death benefit actually goes up.
Guess what happens to your death benefit with term life? Nothing, because the older you get with term the more it costs and the less likely you will be to keep it in place.
The best participating whole life insurance companies will also offer dividends to policyholders each year. The dividends can be used for a variety of things, but primarily the best use of whole life dividends would be for:
Purchasing paid up additions
A paid up addition is a rider that allows you to buy paid up life insurance and accompanying cash value equivalent dollar for dollar on what you paid into it. It is pretty awesome. Essentially, your cash value and death benefit are INCREASING. So the older you get, the larger your death benefit as you move towards that inevitable day.
So that about covers it when it comes to defining whole life insurance and the pros and cons associated with it.
Now some of you reading this might be saying, that is not the whole life insurance I have heard about. Ya, we know.
More on that below but for now just remember this, there are many types of whole life policies. The way you design your policy matters greatly and can mean the difference between a headache and a legacy.
Term Life Insurance
Otherwise known as ‘pure’ life insurance, it should really be called “death” insurance, since the primary benefit is to provide for your beneficiary when you die.
Term life is often chosen by the younger generations as a protection just in case one was to die early. Just like we saw with whole life insurance, the death benefit works in exactly the same way in that it will be paid to the beneficiary as long as the insured passes away within the dates of the policy, i.e. the contract.
Term life insurance typically has no cash value, although some ROP (return of premium) term policies may have a little cash value accumulation.
The duration (i.e. the term) of the policy can vary somewhat with some insurers offering one year (called annual renewable term) all the way up to 30 years. Normally, you will see opportunities at five year intervals between 5-30 years, with at least one company offering the ability to tailor your policy in yearly increments from 15 year terms to 30 year terms, i.e. 16, 17, 18, 19, etc.).
For the most part, people tend to opt for a 20 year term. This is due largely to the fact that those who buy term are usually younger and there is not much difference between the price on the 15 year and 20 year term policy so they just pick the longer term.
Level Term Life Insurance
Most term life offered is level term. With level term life the premiums will stay the same for the duration of the term.
However, there are companies out there that offer 5 year term products based on age brackets where the premiums increase every five years.
It is important to read the fine print to determine if the policy you are considering is fixed premiums or if the premiums increase every year or every five years.
Although term life insurance isn’t necessarily required insurance for young adults who are still living at home and have no family to look after, experts believe that responsible parties should take out a policy as soon as someone becomes dependent on them.
For example, if you had your parents co-sign on your student loans, then getting a policy would be the kind thing to do so you don’t leave them with the debt. And before you say that student loans are forgiven on death, read the fine print. Just because the loan is forgiven does not stop the IRS from counting the forgiven loan as income for that year. Thank you, Uncle Sam.
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Another example would be if you have a spouse and child that rely on your income, a policy would ensure that your income is replaced for a certain amount of time should you unfortunately die prematurely.
If you’re just looking to cover your mortgage or until your child is old enough to be living on their own, you can choose term life insurance that lasts this amount of time, either until the child is old enough for independence or to cover the duration of your mortgage.
Make sure the policy is convertible term life insurance that can be converted to the type of permanent coverage you desire to one day own and you can simply defer getting your whole life policy until later. But you will be locked into a policy, so that if you do get struck with some sort of life altering sickness, you can convert your term life to whole life with no proof of insurability.
This means you will not have to take a life insurance blood test or answer health questions. You simply let the company know you want to exercise your right to convert your policy from term to whole life, and voila, there you go!
There is some paperwork involved. But if you have contracted a deadly disease the insurance company cannot deny you the option to convert your policy. Once again, we emphasize the importance of choosing convertible term with a company that offers a decent policy to convert to.
Pros and Cons of Term Life vs Whole Life
What are the main differences between the two, including the pros and cons, and what should you keep at the front of your mind when choosing the right policy for you and your family?
Choice of Length
The typical argument on term vs whole life regarding how long each lasts goes something like this:
Term life insurance allows you to choose the length of your policy while whole life will last until you die. When deciding which one to go for, you have to assess your needs and for what the death benefit will be used. If it will always be needed regardless, whole life insurance may be the better option. Term works for those on a limited budget. However, you will have to renew or find a new policy if you outlive your term life insurance and your premiums will almost certainly increase because you will be older.
This is a good argument pro and con both types of life insurance policies. Term is less expensive originally but term becomes cost prohibitive the older you get. Whole life is more expensive up front but over time the premiums may stop or be covered via the dividends. In other words, with whole life you can keep the coverage until you die and you probably won’t pay premiums on the policy later in life, particularly if you chose limited pay life insurance.
Low Annual Premium
The typical argument in favor of term goes something like this. Buy term and invest the difference. This life insurance meme was probably started by Dave Ramsey ranting against whole life insurance, or perhaps some other financial entertainer, but it has taken on a life of its own.
Anyway, the premium payments are likely to be a huge factor within your considerations so it is important to know that whole life insurance will be the more expensive of the two, INITIALLY.
With term life, one of the major pros cited by so called experts is that it is a more basic coverage and it only lasts a certain amount of time so the initial premiums will be lower.
However, there is a trade-off to consider because whole life insurance can also be affordable when young, depending on where you are financially. (A good argument can be made to choose whole life insurance for children.)
So if you choose term life now and then renew later down the line, you will be left with higher premiums because you will be older and you could even have certain health issues that make it difficult, if not impossible, to qualify for additional coverage.
Contrast the pros of term with the pros of whole life regarding the amount of premium paid annually. With whole life you lock into your premium.
A properly structured policy will maximize your cash value and allow you to access it quickly, if necessary.
When you are young, your whole life policy premium probably runs around the monthly cost of netflix or your cell phone bill. But what you gain is insurance that acts as an asset and that will grow in cash value and death benefit over time and allow you easy access to the funds for investments, paying off debt, or retirement planning.
Another whole life insurance pro is that whole life is the only one with cash value that builds over time that can be withdrawn or borrowed against via a policy loan.
If you need basic coverage and have no need for cash value, or the premiums are initially too high, term life insurance is the way to go.
But bear in mind that you will receive nothing in return. You are simply “renting” life insurance with term life.
Over time, the cash value of your policy can be useful, especially for specifically tailored whole life policies designed for the purpose of employing the infinite banking concept.
Buy Term and Invest the Difference
First, realize that not one of your investments outside of life insurance offer the leverage of a death benefit. That is one primary reason why life insurance is a good investment.
Second, all your realized gains with whole life are not taxed each and every year. However, with buy term and invest the difference, your realized gains (i.e. when you sell) and any dividends received are going to be taxed every year.
Third, without even going into the argument that proponents of buy term and invest the difference greatly exaggerate what the returns will be (who gets 12% returns anymore?) on the money that isinvested, this idea fails primarily due to one major reason: no one actually does it!
That is, no one actually buys term life and computes out the difference saved between term and whole life, and then uses that figure to invest with. Just like most tired cliches, it makes a great sound bite but it lacks any substance once you scratch below the surface.
Fourth, when you invest the difference, where are you sticking it? With whole life, policy withdrawals are tax free up to your basis in the policy. However, there are so many rules and regulations on early withdrawals of IRAs and 401k withdrawals.
Plus, who do you want holding your money, a mutual insurance company or a mutual fund company? Remember the crash of 2008? MassMutual came out unscathed but where is Lehman Brothers?
Instead of buying term and investing the difference, why not buy whole life and use your cash value to invest with, while also receiving guaranteed return and dividends on your cash value? That way your money is working for you in two places at once.
One more thing about buy term and invest the difference. Just know that with whole life, your return is GUARANTEED. That is another reason whole life insurance is a good investment.
What about your investment with the “difference” you saved by choosing term life vs whole life? Ya, you guessed it, the investments you choose are not guaranteed. You assume all the investment risks. And with the stock market at an all time high, it is simply a matter of time before a sizeable correction occurs. Buyer beware!
Guaranteed Death Benefit
As long as you keep up with the premium payments and you don’t cancel the policy early, there will be a guaranteed death benefit on both term and whole life.
With whole life insurance, you have to remember to pay back the life insurance loan and interest, otherwise this will have an impact on the death benefit. With term life, you have to remember to plan on converting the policy or self insure.
Self insure: figure out some way to leave behind money to your family when you are gone apart from life insurance. Self insuring is not a good plan considering the leverage you get with life insurance, the tax benefits, and the ability to earn true compound interest on your cash value.