09/06/2024
The Million Dollar Question when it comes to life insurance:
Is Term Life or Whole Life Better?
The term vs whole argument has been around longer than I believe alive. I know from my knowledge (and I still have MUCH to learn), around the 1970s, 90% of all policies sold were term. However, over the next 20 years, 90% of all policies became term. So, I want YOU to decide for yourself based on FACTS; not old rhetoric, what mama and em say or what your friends say (that may or may not be in the industry). But what do YOU believe?
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Whole Life vs. Term Life Insurance: What’s the Difference? 🤔
When it comes to protecting your loved ones, life insurance is essential. I'm sure you agree. But what kind of policy should you choose?
🌿 Let's start with Whole Life. Whole life Insurance, also considered permanent insurance, offers a specified coverage amount for a monthly premium that does not change for the course of a person's natural life. So, if you get a $25,000 policy at age 25 for $25.00/month, or at 50 for $100.00/month, that monthly amount does not change during the course of your lifetime, given you are keeping up with the premium payments. Sounds good, right? Whole life also combines insurance with a cash value, seen as a savings component. Here's what that means: whatever monthly premium amount you are investing, it goes to your death benefit....and if you hold on to the policy for some years, you will see a cash value built up. Should you decide you want or need some cash while you're living, and what to use your life insurance policy to get said cash, then you borrow from that cash value (which means you must pay it back). If you happen to die before you pay the borrowed cash back, the outstanding loan will be deducted from your death benefit, which means less pay out for your beneficiaries. Also, if you take all of the cash value on your policy, then you will lose your life insurance. Whole life policies basically have you paying for two products - cash value and life insurance; yet you ultimately can only walk away with one or the other. Also, because you are locking in a rate for life, the premiums are generally 3x or more expensive than a term policy.
Let's look at Term:
💡 Term Life Insurance provides a specified amount of coverage at a specified rate for a period of time. The terms range from 1-40 years, depending on the company (most companies stop at 20, Primerica goes up to 35. I've only seen one company mention 40, very rare). Now why get insurance for a specified amount of time? If you're a business owner, it could be to cover an employee at your company whose loss would financially devastate your business. If you are a parent of young children, the coverage would provide adequate funds during the most vulnerable stages of their lives. If you are on a wealth building journey at whatever age and need time to build said wealth (thru various investments), the term policy will give the money you want to your loved ones to have if you happen to die before you build. Because the rates of term are not locked in for your natural life, and there are no cash value or other fancy extras to it and provides pure coverage (just insurance, nothing else), you would get the same amount of coverage at fraction of the cost of whole life. Example, a $500,000 term policy is at least the third of the cost of a whole life policy.
NOW, the question is often asked, "what if the term runs out when I am living?" GREAT question! As a Primerican, I will tell you: if you have a term policy and you DO NOT have an investment riding with that (may I suggest a mutual fund?), then you will be a not so happy camper at the end of that term because your premium will be adjusted to your current age at the time of renewal, and um yeah.... who wants that? So, because you are NOT spending so much in life insurance when you go with term (usually), then you can use your extra savings to invest in more flexible, high-return options that you fully control. That way, SHOULD you outlive your term policy, when it's time to renew, life will be different, your family needs will be different (you can still renew your coverage, you may not needs as much anymore), and if you have played your cards right, you are now self-insured - which means, you have enough cash YOUR banks to keep your family afloat now and generations to come.
So, what kind of policy should you buy? The one that fits your family's wealth strategy. Do you want to spend all of your money in insurance with the ability to get a loan throughout your life; or do you want to spend only what you need in insurance and put the rest in a separate investment account that can be used throughout your life and not affect your life insurance coverage? You decide.
And when you do, Let’s chat! 💬
