Finished? The whole life? Which to choose? This is the fundamental question when planning to buy coverage to protect yourself while you are alive.
First, let’s look at the differences between term life insurance and whole life insurance.
In simple terms, the income terms are pure coverage for a specified number of years. You are protecting yourself and the income you produce over a period of time. We say protect your income because that’s what life insurance is. Your children depend on you for their income and if something happens to you, your income is protected with this coverage. With term, the monthly premium does not fluctuate during that period of time either.
A term policy can be purchased in increments from one year to 30 years and that is generally the period of time for which you need life insurance. Once your children are grown and able to support themselves, it will no longer be necessary to have this type of coverage if you continue to save and invest your money outside of your term policy.
The beneficiary is named in the policy (it could be his spouse or other family members) and, after the death of the insured, the established amount is paid to the beneficiary.
Term policies cost much, much less than WholeLife policies. There is no investment portion associated with this type of warranty coverage.
This type of permanent insurance combines Term Ins and an investment. The insured pays a monthly premium for the rest of his life. It is life insurance for the entire period of the insured’s life (plus an investment component).
With this type of permanent coverage, you should know that as people age, the risk of death increases, making the cost of insuring it much more expensive. If you understand this, you will find that even if the insurance agent tells you that you will pay the same every month on a permanent policy, your monthly premium will start to go higher and higher in the future.
Unlike Term, with Whole Life Ins you now have an investment component linked to your policy (under the ins co) that could be in:
Bonds / Money Market / Stocks
The monthly premium is also a fixed amount (which is what you are told) each month and is generally more expensive than term enrollments.
A portion of the funds you are paying on a whole life policy will go to an investment vehicle which is the cash value portion of a permanent policy. There are some investment vehicles to choose from with the insurer. You can “borrow” the money and pay it back with interest. Which means you can borrow for emergencies, family vacations, and especially your kid’s college fund is what your ins co-agent will tell you.
Creation of cash value
The cash value investment is kept within and attached directly to your policy for the life of the policy. The first year of the policy there will be no cash value because the money you pay the first year is used to pay the high commissions that the agent receives for pushing this type of enrollment to their clients.
Life insurance premiums, whether term or lifetime, tend to increase much more dramatically after age 50. Keep in mind that term life insurance companies cannot insure people over the age of 65.
As we mentioned before, the cost of insuring a person increases with age and as the policyholder ages. Initially, the costs of the policy will start to consume the cash value where the amounts will start to decrease. As soon as the cash value amount runs out, the insured will see higher monthly payments in the future without realizing it, especially if the payment area is already automated to be deducted from their bank account.
Term insurance versus whole life insurance? Which?
Term life insurance is much less expensive, and with your savings you can put that money into whatever investment you choose and control.
Wholelife is coverage plus an investment component. The investment component is marketed as “forced savings”, but they are savings within a limited number of investments under the control of the life insurance company. Ask yourself if you would ever have some kind of investment tied to your car tickets. It just doesn’t make any sense.
Our recommended strategy:
When you get your term policy life insurance, you can calculate the difference between a term policy and a life policy.
It would be wise to buy a term insurance policy and invest the money you save in any investment vehicle of your choice, be it money market, bonds, mutual funds, or non-insurance stocks. You will have coverage and total control of your money (you will not need to borrow it if it is a permanent policy).