Term vs. Whole Life Insurance? whats a clear difference between both of them?
I’m seeing the same old tired, ignorant mantras: "It’s expensive," "It’s a ripoff," "term’s cheaper," etc.
Each and every type of life insurance product that exists is the best, most cost effective alternative for someone in a particular situation, so anyone who opens the discussion by stating that one type is "better" or "cheaper" than another has just disqualified himself from the conversation. The secret is to consult with a properly qualified financial planner or advisor, not an insurance salesperson.
BTW, in response to mbrcatz’ comment, I’m 48 and bought a whole life policy at age 30. I paid into into it for eight years and stopped. I illustrated the policy out using very modest interest and dividend rates, and it is likely that the policy will remain in force for my entire life without dropping another penny of premium into it. Even if it were to hold out only another 20 years, I’d be FAR ahead of any term policy.
Also, no insurance product has a "gimmicky savings account" attached to it. Anyone who says this has no clue about the purpose of cash values in a life insurance policy. Further evidence that insurance salespeople are not qualified to offer life insurance.
ADDED:
@Mr Prefect: "Sorry Pickle but no insurance plan will get you or anyone a 40% return."
I’m not sure what you’re getting at. Pickle was referring to the policy’s cash value being 40% of the death benefit. In a typical whole life policy, the least efficient type of permanent coverage, this happens in about the 30th policy year for a policy taken out by a 30-year old male. In fact, shortly thereafter, the cash values will normally exceed premiums paid.
"Who needs to spend up to 9 times as much per year for whole life that in the ends nets you the same amount."
If you want to "buy term and invest the difference," there is no place more efficient to do that than inside a VUL policy. Term policies are temporary insurance for temporary needs. Unless you die, they "net" you a loss. In other words, with term insurance, you HOPE to lose your money. With permanent policies applied to the proper scenario, you can never lose.
Finally, thanks Pickle for some good insight, especially pointing out that Judy should probably keep her poorly-founded opinions to herself on this topic.
Recommended Reading
- Business Insurance Agents
- Sizzling Suze – Whole Life vs Term Life
- Maxine Sullivan on Art Ford’s Jazz Party – 09 18 1958 (Part 8)
- Susan Orman on Life Insurance
- Business Strategic Development (ebook)
Don’t even think about it.
Get term.
Whole life only makes the person selling it to you rich.
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Term is pure insurance, for a set period of time. Whole life, never expires (which means you pay into it a lot longer) and it has a gimicky savings account attached to it. It costs a way WAY lot more than term life.
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Term is like car insurance. If you use it the insurance company pays someone. If you don’t use it you live. Either way someone wins. And hopefully you never have to use the insurance.
Term is cheap. Get level premiums for 20 or 30 years.
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I’m seeing the same old tired, ignorant mantras: "It’s expensive," "It’s a ripoff," "term’s cheaper," etc.
Each and every type of life insurance product that exists is the best, most cost effective alternative for someone in a particular situation, so anyone who opens the discussion by stating that one type is "better" or "cheaper" than another has just disqualified himself from the conversation. The secret is to consult with a properly qualified financial planner or advisor, not an insurance salesperson.
BTW, in response to mbrcatz’ comment, I’m 48 and bought a whole life policy at age 30. I paid into into it for eight years and stopped. I illustrated the policy out using very modest interest and dividend rates, and it is likely that the policy will remain in force for my entire life without dropping another penny of premium into it. Even if it were to hold out only another 20 years, I’d be FAR ahead of any term policy.
Also, no insurance product has a "gimmicky savings account" attached to it. Anyone who says this has no clue about the purpose of cash values in a life insurance policy. Further evidence that insurance salespeople are not qualified to offer life insurance.
ADDED:
@Mr Prefect: "Sorry Pickle but no insurance plan will get you or anyone a 40% return."
I’m not sure what you’re getting at. Pickle was referring to the policy’s cash value being 40% of the death benefit. In a typical whole life policy, the least efficient type of permanent coverage, this happens in about the 30th policy year for a policy taken out by a 30-year old male. In fact, shortly thereafter, the cash values will normally exceed premiums paid.
"Who needs to spend up to 9 times as much per year for whole life that in the ends nets you the same amount."
If you want to "buy term and invest the difference," there is no place more efficient to do that than inside a VUL policy. Term policies are temporary insurance for temporary needs. Unless you die, they "net" you a loss. In other words, with term insurance, you HOPE to lose your money. With permanent policies applied to the proper scenario, you can never lose.
Finally, thanks Pickle for some good insight, especially pointing out that Judy should probably keep her poorly-founded opinions to herself on this topic.
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Financial planner, 11 years
Judy should refrain from answering. If you want insurance forever get whole life (or some version that will last forever…guaranteed universal life, etc..). Term insurance only lasts (essentially) for the length of time that the premium is guaranteed. In other words getting a 30 year term makes no sense to a 20 year old if they want coverage when they’re 65 years old.
I’m not a big advocate of whole life insurance, but anyone that tells you not to do it without knowing any facts shouldn’t be sharing their uneducated opinion.
The ‘gimmicky savings account’ is to offset the cost of the insurance so that the plan lasts forever. When your $1,000,000 has $400,000 of cash you’re only buying/paying for $600,000 of insurance.
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Sorry Pickle but no insurance plan will get you or anyone a 40% return.
Consider term basically for the savings. Who needs to spend up to 9 times as much per year for whole life that in the ends nets you the same amount.
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There are a lot of opinions on the subject. Keep in mind that when dealing with financial matters, there are several opinions. Some people clearly dislike whole life insurance and even go a bit over board in their opinion. Personally, i prefer term.
Educate yourself, take your time and make an informed well reasoned decision. The following article explains the differences between whole and term conceptually.
Do you have an opinion on the matter yet? Good Luck!
References :
http://www.besttermrates.net/how-to-find-the-best-term-rates-for-life-insurance/
What is cash value life insurance? It is a term policy to age 100 that contains a savings vehicle in it. Cash value comes in many forms, such as whole life, universal life, variable life, or a mixture of those words together such as variable universal life or universal whole life, etc. The advantages of having cash value life insurance is that you are protected until age 100, you can use the cash value anytime for any use such as paying your premiums, and interest on your cash value is tax-deferred.
The disadvantages of having cash value life insurance is that you are paying lots of premiums for low amount of coverage, no cash value is accumulated during first two years of the policy, rate of return is very low, and if you use any of the cash value, you will owe monthly interest on it. This interest does not go back into the cash value, but rather kept by the insurance company because the money you taken out of the cash value is treated as a loan. In many policies, if you were to die, your beneficiary will receive the face amount and all cash value will be kept by the insurance company. Keep in mind, if you use any of the cash value and you did not pay it back, this amount will be deducted from face amount upon your death.
Another disadvantage of cash value life insurance is that they are riddle with insurance fees. The most noticeable fee is the surrender charge. This is clearly stated in the policy of how much cash value you will get if you surrender the policy. Then there are fees you don’t see such as administrative fees, policy fees, maintenance fees, and all these other operating fees. If your cash value life insurance is a variable policy, that means your cash value is invested in the stock market. Investments too have their own operating fees. If you combine investments and life insurance together, now you have so many different fees that eats away the returns on your investments.
You are probably asking, why would anyone buy this kind of life insurance? First reason is that many people do not understand how this policy works. Second reason is that people don’t buy life insurance, they are sold on it. The agent who sells cash value life insurance does not care about you or your family. All he/she cares about is how much commissions he/she is getting paid and they going to use whatever deceptive sales tactic to make you buy it.
So, what is term insurance? It is the type of insurance that provides a level death benefit for life. Just like car insurance, if you don’t pay your premiums, you will lose coverage. Advantages of having term insurance are: premiums are very low during the term, you have more flexibility to invest your money in a savings vehicle (hence the phrase, "buy term and invest the difference"), and if you were to die during the term, your beneficiary will get the face amount and all your investments. Another advantage is that you can change the amount of coverage without affecting your savings and vice versa. (In cash value life policies, you are stuck with paying into both.)
The disadvantage of term that while premium remain fix for certain amount of period (10, 15, 20, 25, 30, or 35 years), the premium will go up when it is time to renew. Majority of term policies provide renewable term coverage up to age 100. But there are some term policies that stop coverage after the level term expires because the insurance company wants you to convert it to whole life or universal life.
Why would people buy term insurance? First, premiums are very low and remain fix during the term. In the early stages of your adult life, you probably have lots of debt to pay off such as your mortgage, you probably have kids to support, and you probably don’t have much money saved for retirement. So you need lots of insurance coverage to protect the family. As you get older, your kids are all grown up, your mortgage is or almost paid off, and you better have lots of money saved for retirement. As you get older, you probably won’t need life insurance or need as much coverage as you did 20 to 30 years ago.
What happens when the level term expires? When the level term expires, you enter the phase of the contract called "Annual Renewable Term." That means you have the right to renew the term without having to provide proof of insurability. The premiums will go up every year or so (check the policy on how often the premiums goes up after the level term). Depending on your policy, you are usually given several options when the level term expires.
(1) You may convert it to a permanent whole life policy (which I don’t recommend).
(2) You may exchange it to another level term
(3) You may refuse to pay the premiums to cancel the policy
(4) You can change the death benefit
(5) You may renew the term for another 5 years until age 75, which then you may renew every year until the policy expires.
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Financial Adviser