I am a huge fan of term life insurance, and I do not favor whole life insurance or cash value life insurance. For most people, term life insurance is the best option. Very few consumers need permanent life insurance. There are many benefits to term life insurance that make it a great insurance product for people who are looking to protect their income and continue to provide for their families and loved ones in the event of their untimely death.
Term Life Insurance Is Cheap
The best benefit of term life insurance is its price. Term life insurance is incredibly cheap when compared to whole life or cash value life insurance products. Whole life insurance is an insurance policy that remains in place for the beneficiary’s entire life as long as they continue to make premium payments. Cash value insurance policies are very expensive because they have a cash account component that is an investment and grows in value over the life of the insurance policy. Term life insurance is a pure policy with no cash value, and that is why it is significantly cheaper than the whole life version. To give you an example, you can expect to purchase a $100,000 whole life insurance policy for approximately $100 per month. A $500,000 term life insurance policy will cost you about $70 or less per month. You can purchase a significantly larger amount of insurance protection for even smaller premium payments than a cash value policy.
Term Life Insurance Covers What I Need
Term life insurance is simple to understand. There so many different types of cash value insurance policies. Whole life is actually a type of cash value insurance policy. The insurance industry also offers other options such as variable life, universal life, and many others. If you are willing to pay an additional fee on the premiums, you can really have many different types of whole life insurance policies with tons of different options that are available. But, with every different option you chose, your premiums will increase. There is a price to pay for creative insurance options.
You Should Invest Your Money Yourself
Insurance is not an investment. It is not an investment vehicle. It should not be used to earn money. One of the most popular arguments against whole life insurance and in favor of term life insurance is that you can invest the difference yourself and earn a higher rate of return. For many cash value life insurance policies, the cash that you earn inside the policy’s investment options is a very low rate of return and barely keeps up with inflation. If the difference between a cash value policy and term life insurance policy is $50 per month or $600 per year, you could have a nest egg of over $74,000 which would be far greater than the cash value you would have built up over thirty years with a while life or cash value insurance policy.
Term life insurance has a lot of benefits in its favor over whole life or cash value life insurance. Term life insurance is incredibly cheap when compared to its whole life insurance brethren. Not only can you save an incredible sum of money with term life insurance, but now you also are able to select the investment for the difference instead of the insurance company. Term life insurance is an incredibly simple type of policy that provides you and your family with a vast amount of protection.
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{ 9 comments… read them below or add one }
Whole life is riskier too. I’ve seen my families income fluctuate and there are times I wouldn’t have been able to afford the higher premiums. I know there are usually provisions in whole life that make it flexible. Still, it would be a much larger drain on resources when term life is so cheap.
Shaun @ Smart Family Finance recently posted..Comment on Cash Burn Rate: What is It and How is It Helpful When Your Expenses Exceed Your Income by Shaun Fowler
Thanks a great point, Shaun. Thanks!
Hank recently posted..How A Foreclosure Affects Your Credit Score
“One of the most popular arguments against whole life insurance and in favor of term life insurance is that you can invest the difference yourself and earn a higher rate of return.”
I’m not entirely certain about this. My roommate sells insurance and tried to get my wife and I to buy a whole-life insurance policy (we didn’t in large part because our income was subsequently cut). IIRC, it offered a 3 or 4% guaranteed return. That’s as good as any savings account I’ve ever seen, and a lot better then what’s available right now.
There is one issue with your hypothesis though Edward. A savings account is not an investment. If you actually, truly invest with stocks, bonds, or mutual funds the different in savings between whole life and term life insurance, then you would earn quite about more over the long-term than 3% to 4%.
Hank recently posted..How A Foreclosure Affects Your Credit Score
Stocks were an issue that I had intended to address this morning, but I ran out of time before I had to leave for work.
There is a question of risk tolerance. I have a very low risk tolerance. I have a small IRA entirely funded with mutual funds and primarily in income generating funds. Not going to get my the highest return, but probably the highest return that my risk tolerance will allow.
Personally, I prefer term. You have to know that for an insurance company to make money and profit, the investments will make more than they pay out. I prefer to cut out the middleman.
cashflowmantra recently posted..Refurbishment Firm Fined After Exposing Public to Asbestos
That’s a great point! I never quite looked at it like that with the insurance company being the middleman in the investing equation.
Hank recently posted..How A Foreclosure Affects Your Credit Score
Both term and whole life have its pros and cons. I like term because it is cheap and I like Whole because of investment aspect. That’s why I ended up adding both term and whole to my life insurance portfolio. You should not ignore whole life just because it is more expensive. It’s expensive for a reason and if you examine closely, it could be worth your money. I just don’t like that fact that I feel like I am throwing away money with term life because I’m not planning to die within 20 years.
UltimateSmartMoney recently posted..Which is Better: Working or Taking Care of Kids?
If you have the dough it boils down to math. Can you make more by investing the whole life premium you save than you would in (whole life ineterest + term life premium). Yes: then term life is better. No: then whole life is better.
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