Whole Life or Term?

There are several different types of life insurance products on the market, but for the most part they fall into two distinct categories: whole life and term. Which one is better?

There are several different types of life insurance products on the market, but for the most part they fall into two distinct categories: whole life and term. Which one is better? Term, without a doubt.

Whole life insurance is designed to cover you for, well, your whole life. You can purchase a policy at 21 and rest assured that the policy will be in force until you turn 100 if you’ve paid your premiums. It’s also considered a savings vehicle because there’s a cash value to that policy. Sounds good, right?

Wrong.

Policy premiums are calculated on your risk of dying during the policy’s term. While the 100+ age group is the fasted-growing population in America, most of us will probably die before 100. On the off chance that you do live to 100, your life insurance policy would automatically pay you the face value. So the company knows that there’s a 100% chance that they will have to pay you or your beneficiaries. They charge a higher premium for that.

Term life, on the other hand is issued in 5-, 10-, 15-, 20-, 25-, and 30-year increments. If you’re in your twenties, your life expectancy is probably over seventy. The odds are fairly good that you won’t die in the next thirty years. Insurance companies know this, and charge a lower premium.

That cash value that whole life policies have? The company will allow you to borrow against it, but you will be required to pay it back with interest. If you die with an outstanding loan, the insurance company will deduct that amount from the face value, which means your family will receive less money. And if you don’t have any outstanding loans, you don’t get to keep that cash value. The insurance company keeps it as part of the “cost of doing business.” Funny, I thought the premiums were supposed to cover the cost of doing business.

Term life has no cash value, so there’s no overhead for managing an investment. You keep the part of the premium that would go toward that cash value in a whole life policy. That’s more money in your pocket.

So what to do? Buy term and invest the difference. If it would cost you $100 a month to have $100,000 in whole life coverage, you can most likely get the same coverage for only $50 a month. That leaves $50 that you can invest on your own. Historically, the stock market has earned 10% over any 30-year period. If you were to invest your $50 a month at 10% (compounded annually) you would have $107743.58 at the end of your thirty year term. If you died during those thirty years, your family would also receive the $100,000 from your term life policy. So your family would receive at least $100,000 if you live, and over $200,000 if you die. Whole life would pay your family $100,000, minus any outstanding loan balances against the cash value, and only if you die.

Makes sense to go with term life, doesn’t it? If you’re ready to make the switch, or if you’re one of the 68 million Americans who don’t have life insurance at all, contact us today to schedule a consultation.

2 thoughts on “Whole Life or Term?”

  1. Good article. I am selling Toronto term life, so I am naturally fan of term products. Their advantages are significant, however, I believe there are still people who would prefer whole life products. Why? Because they don’t have to care about it anymore. But especially when you are starting your career, taking your first mortgage, delivering kid, simply – you don’t have bags full of money, term life is ideal solution for you and your protection. You can have good policy for few bucks a month…
    Take care
    Lorne

  2. Why would you want to pay more for insurance than you have to? For an “investment” that you and your beneficiaries don’t ever see? I suppose if you have the money to blow, then go for it.

    I’ve spoken with insurance agents who have been in the business for YEARS. The consensus seems to be that whole life was/is sold so much more often thhan term life because that’s what the companies trained the agents to sell. They’d get days of training on whole life, but only a few minutes on term. Why? The company makes more money off of a whole life policy than a term life. The agent also makes a higher commission. Seems like it’s a good deal for everybody except the customer!

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