Is term life insurance cheaper than whole life? Is whole life insurance a scam? What’s the scoop?
Term: Inexpensive at young ages, there is no cash build up so there are no loans, renewable up to age 70, premiums increase with age. Term Life is a good product for paying off estate debt.
Whole Fixed Premium: Provides a cash value accumulation and is paid off through ones lifetime. The cash value can be used for loans. The policy is invested in the insurance companies general account with a guarnated mininum interst rate on the payout. For building wealth there are better products to do so with then Whole LIfe Insurance.
Mr. Warner is all over it. But I want to give you a little insight to our world. Whole Life is a far better sale for an insurance rep than Term due to ongoing commissions. Often, whole is pushed as a solution when term does the trick at a far lower cost. There are absolutely scenarios where whole life is more suitable. I'm just saying - be careful. Like anything else. Understand the product before you sign-up for it. It's the advisor/rep's job to insure you have the proper level of understanding.
I think the best place to begin is to understand the fundamental differences between term and permanent life insurance. Neither of them are a "scam", rather they just serve two vastly different risk management purposes.
Term insurance is often referred to as pure insurance. Term policies provide life insurance coverage for a specified period of time. You can typically buy term insurance for periods ranging from 1 to 30 years. If you die during the policy period, your beneficiary receives the policy death benefit. If you don't die during the term, your beneficiary receives nothing. At the end of the specified policy term, your coverage simply ends. You may be able to renew your policy without a physical exam, but at a much higher premium. Once you reach a certain age (usually 70 and older), you may find it difficult to get term insurance coverage--and if you can, the premiums will be very expensive. There are several variations of term life. You can buy a level death benefit or a decreasing death benefit with premiums that increase annually, or that are level for a period of years (5,10,15, 20, 25, or 30).
Cash value insurance, often called permanent insurance, is life insurance that is designed to have you pay a "levelized" premium throughout your life. In some cases, you may fund a cash value policy in a way that the cash values can be used in later years to pay future premiums. As long as you continue paying your premiums by whatever means, cash value life insurance continues throughout your life, regardless of your age or your health. As you pay your premiums, a portion of each payment is placed in the cash value account. During the early years of the policy, the cash value contribution is a large portion of each premium payment. As you get older, and the true cost of your insurance increases, the portion of your premium payment devoted to the cash value decreases. The cash value continues to grow--tax deferred--as long as the policy is in force. You can borrow against the cash value, but unpaid policy loans will reduce the death benefit that your beneficiary will receive. If you surrender the policy before you die (i.e., cancel your coverage), you'll be entitled to receive the cash value, minus any loans and surrender charges. Many different types of cash value life insurance are available, including whole life, variable life, universal life, and variable universal life.
Based upon your current income and obligations, the answer is based upon that answer from you. If you are in the beginning stages of earning a living then you might want to consider term insurance that allows for conversion to whole life at a later time. Why do I like whole life? The prime reasons are as follows: Whole life builds up cash value (more so through a Mutual life insurance company) that is asset protected from creditors. It grows tax free (better than tax deferred). It can be used as collateral, whereas qualified plans (401k, IRA, etc) cannot; the beauty of this concept is that you can borrow from a bank the money held in the whole life policy at very low interest rates and then write off the interest paid if used for business purposes. In the long run whole life is cheaper than term because after a period of time all of your premiums are added to the cash value and all of the money you paid in is in cash value, effectively making the WL policies death benefit free (I know Susie O, tries to tell people to buy Term and invest the rest for retirement...how did that work out for those wanting to retire in 2009?...Not so well!).
Here is my sermon! Insurance is meant to spread risk among many people for
particular events. How is that for brilliance? My perspective says that life insurance is
meant to take care of the financial risk to others of your dying prior to reaching some
financial goal. That goal can be the paying off a debt, providing financial support for
some individual or entity and so on.
Could I suggest that term insurance and permanent insurance have different uses.
Term insurance is useful when there is a specific period of time that financing is
necessary. As an example, for the historically standard mortgages, that is 30 years.
Another example may be that of assuring your children have money to go to college in
the case of your death. If taken out at birth, that term of time is approximately 20 years,
so a 20 year term insurance policy would meet that need. If the need is short term, say
5 to 20 years, term insurance can be very appropriate and inexpensive. Early in life, it is
usually easy to qualify at an affordable rate. Purchasing term insurance later in life is
another question. Health issues may preclude you from getting it for the desired length
of time at a reasonable cost. That is the downside of term insurance.
For taking care of financial responsibilities of a family or a person you love, or some
other lifelong obligation, permanent insurance is a reasonable purchase. In the
beginning of a relationship, the values of earnings over a lifetime is high solely due to
the length of time and most often the initial lack of financial resources. Most often, due
to the cost, people buy lots of term insurance and believe they will accumulate assets
over the course of life to take care of long term needs. While well intended, often that
doesn’t happen and going into the later part of life, there are not enough assets to meet
the obligations. The term insurance expires and people are left at risk. That is a
downside of owning nothing but term insurance. Here is where the purchase of
permanent insurance becomes thoughtful and appropriate. If you have purchased
permanent insurance and all else fails, the obligation has the potential of being met. It
may not be met to the full extent but you will have in some fashion met that obligation.
Insurance holds its position as a safety net which is what insurance is meant to be.
With this type of thinking, you adjust what you spend on insurance to meet your budget
and financial goals. If you choose a permanent policy. the cash build up in the
permanent policy becomes part of your overall portfolio and is accounted for
accordingly. If conservatively managed, it can be viewed as part of the cash or debt
portion of your overall portfolio. If more aggressively managed, then it can be
considered more in line with the equity portion of your overall portfolio. Due to a diligent
compliance officer and various regulatory agencies, I won’t mention the name of those
more aggressively managed products. That would require me to file this letter with a
government agency at a hefty cost. Being a financial guy, you should want me to be
somewhat frugal and not waste my money much less yours. Paying a government
agency for the simple opportunity of answering your question, to me, would be a gaint
waste. So, if you want more information on that you will have to give me a call!
Back to the topic at hand. If you terminiate the permanent policy within the first 5 to 10
years, the initial expenses have a big impact on the internal rate of return and impact
it’s desireability. So, a downside of permanent insurance is the initial expenses
associated with the policy. If amortized over a long period, say 15 or 20 years, the initial
expenses are less of a factor. Another benefit of permanent insurance is that the
savings component grows tax deferred. If allowed to grow for a long period, the tax
deferred compounding can become very significant. As it is insurance, there are riders
that can be added to permanent insurance that offer other safety nets. One is the
waiver of premium. This rider pays the premium on the policy in the case of a disability.
Bottom line is internal expenses associated with permanent insurance and in some
cases the lack of flexibility are considered a downside when compared to other
investment tools. Permanent insurance is a safety net. Safety nets have costs. Those
costs are more than the bright, blue sky. You may agree with me that safety nets are
softer to fall on from any height then the alternatives.
Guarantees are based on the claims paying ability of the issuing company. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial adviser prior to investing.
Term insurance is a less expensive form of insurance coverage and generally designed for shorter term needs. Once the term of the policy expires, you may not be able to attain another policy at favorable terms later, if at all.
Whole life insurance is designed to accommodate longer term insurance coverage needs. A savings element is inherent in whole life policies and can be expected to grow to help meet future policy obligations, but this feature leads whole life policies to be more expensive than term policies—at least in the earlier years.
Term insurance vs. Whole Life is very much a suitiblility question. Few debates in the insurance world are more polarizing than this debate, however. They both have their positives and negatives, so I will analyze both for you. First, term insurance:
-Term provides a high amount of insurance for a cheaper cost. This is something that is appropriate to provide insurance for a particular goal. For instance, it may be preferable for parents who would like a certain level of insurance for a given period of time (generally until the children are grown) in the event of their death to provide for their children. Also, if a recent graduate has student loans that their parents may have co-signed and would not like to leave them with the burden of their loans if they passed away, they can purchase term insurance for the duration of the loan.
-Once the time period for the premium payments is over, the insurance coverage is also over. This could be detrimental if someone's health has deteriorated since they purchased the coverage years ago if they would like to continue their coverage by purchasing a new policy. If this is a concern, you may put a rider on the policy that enables you to convert the term insurance to whole life.
Here are a few points about whole life insurance (fixed):
-Whole life is indeed more expensive than term insurance, but the reason for this is because, unlike term insurance, as long as the policyholder makes the proper payments, the insurance companies must pay the death benefit whenever the policy holder passes away. Term insurance only provides coverage from when the policy begins until the end of the term--it has a finite duration. Therefore, the insurance company is uncertain as to whether or not they will need to pay out a death benefit; this uncertainty does not exist with whole life.
-Whole life insurance has its positives for people who can afford it that make it appealing as an investment vehicle of sorts--perhaps even an asset class. The money you put into the policy provides you with the flexibility of having cash value that accumulates tax-free. This can operate much like a ROTH IRA--where distributions from the policy are tax-free; it differs from a ROTH IRA in that a whole life policy has a fixed rate of return and there is no penalty for taking the money out prior to 59 1/2. While an argument can be made to buy the cheaper term insurance and invest the money you would save in a ROTH IRA to achieve tax-free distributions and the possibility of higher returns, whole life insurance growth is a much slower, but fixed rate of return that may promote peace of mind to a conservative investor.
-The conclusion I am trying to make is that whole life insurance offers a flexibility that can be particularly beneficial for those who can afford it beyond just providing a death benefit. If you are interested in learning more about this discussion, my firm has a white paper that I can send you that goes into further detail about this topic.
Term insurance is easier to get. You pay a set premium every month for the life of the term. Terms are usually 10 to 20 years. After that time, you have to reapply and your premium goes up. With a whole life policy, you pay a monthly premium, but with that premium the build up a cash value that you can usually borrow from Tax-Free. Some whole life policies will allow you to invest a portion of your premiums into mutual funds, or something similar. Always choose whole life over term
All life insurance is term insurance. It is that simple. The ONLY difference is that with Term Insurance you pay the full cost of the mortality costs for the policy. This means when you reach life expectancy, say age 78, you will have paid in mortality premiums - the annual cost of the insurance $74,000 in premiums for every $100,000 of insurance you own. If you are unlucky and life past life expectancy to the 68th percentile, the cost goes to $119,000 per $100,000 of insurance. In other words you have over paid for your insurance.
Contrast that with Whole life, or universal life - here you pay more up front, but you pay our of pocket only 5% of the face amount and compound interest earns the difference. The policy still contributes the same 119% at age 86 or so - but you only put in 5% - the earnings paid the rest, assuming the policy performed.
So you have a choice - you can either pay the term costs that go up and up or you fund some money into the policy in the early years and let interest pay the difference.
So which is better, term or permanent? Tell me when you are going to die, and I'll tell you what to do. But since it is called life insurance, it would be best to buy it for your WHOLE life.
Term life insurance provides simple and affordable coverage that’s sufficient for many families.
Because term life insurance rates are so cheap, you can buy a lot of coverage for the period you need it, such as 10, 20 or 30 years.
Whole life insurance is more complicated than term life and far more expensive. The policy covers you for your entire life and features an investment component known as cash value. The cash value usually grows slowly and is tax-deferred.
Here’s more on how to choose:
• Term life is good for you if you want life insurance while you’re raising kids, paying off debts and/or saving for retirement. In other words, if your need for life insurance has a specific end date.
• Term life isn’t right for you if you want the option to access cash from the policy.
• Term life is best if you want the biggest bang for your buck in terms of coverage amount. With whole life, a portion of your money goes toward fees and into a cash value account that you may never use.
• Term life is a good choice if you’re not sure you want whole life. That’s because most term life policies sold today can be converted to permanent life insurance later on. If you want some permanent coverage but can’t afford it yet, buy all the convertible term life insurance you need now with an eye toward converting a portion of it down the road. Before you buy, understand the deadlines for conversion and the types of permanent products that will be available.
• Whole life is right for people who want to use their life insurance policy as a savings vehicle. It allows you to borrow money against the cash value or surrender the policy for the cash. But you have to repay any loans with interest before you die, or the payout to your beneficiary is reduced, and surrendering the policy will end the coverage altogether.
• Whole life and other types of permanent life insurance are good if you have a large estate that would be subject to estate taxes (currently, you can pass $5.45million to your heirs and not have any federal estate taxes). Your heirs can use the life insurance money to pay the taxes after your death.
• Whole life and other types of permanent life insurance may be a good choice for those who expect to have lifelong dependents, such as a child with special needs, and who want to find a trust with life insurance.
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