I have a few insurance agents in my family who tell me that quite a good number of customers aren’t familiar with the differences between whole life insurance and term life insurance. In fact, a lot of folks tend to think that life insurance comes in one flavor. Of course, that’s not the case.
What Is Whole Life Insurance?
Whole life insurance serves a dual purpose. First, it acts as a life insurance policy in case something happens to you, and ensures that your family is cared for financially in the case of your death. In addition, this type of policy acts as a type of savings or investment account. The policy is typically for life (unless you cash it in), and usually carries much higher premiums. As you pay your premiums every month, you build what is called a “cash value” in the life insurance. This means that if some unforeseen event occurs, you do have the option of borrowing from this cash value to pay for that emergency. This type of insurance can be included in your net worth because it acts as a savings account. Therefore, it is considered an asset.
What Is Term Life Insurance?
On the other hand, there’s term life insurance, which is insurance that is in effect for a specific amount of time, typically for twenty- to thirty-year terms. This type of insurance carries no savings, and the premiums are much cheaper than a whole life insurance policy. And that is what’s so attractive about it. It’s a lot cheaper. This is because you pay premiums on this insurance for the term of the policy, and then when that term is over (if you are still alive), there is no savings. And here’s where most people take a misstep or two: they write off term life because they aren’t getting anything back at the end of the term. But the point here is whether you really want to use your life insurance policy as a way to save. I personally don’t feel that you should. You should ask yourself whether you would prefer using your insurance payments as a savings vehicle or whether you should keep insurance and savings separate. Term life costs much less because you are only using it for insurance purposes and it acts just as it should: as a life insurance policy that takes care of your family should something happen to you.
Comparing Whole Life Insurance vs Term Life Insurance
So, which policy is better? Well, that depends on how much money you have to spend and your expectations for the future. If you need a policy to assist your spouse and children over the next twenty years should something happen to you, and you expect to have a substantial amount of money saved in other investments by the end of that twenty years (typically ten times your income), then term life insurance may be the way to go. In addition, keep in mind that if you have a whole life insurance policy and you die, the insurance company usually keeps the “cash value” on that insurance. They still pay out the policy’s death benefit amount to your family, but your family won’t get the “savings” that you paid such high premiums for when purchasing this type of insurance.
Another helpful tip is to make sure you are comfortable with your insurance agent; as with anything else, shop around. It is important to know that a good insurance agent will save you money on your life insurance policy — whether you choose whole or term life insurance.
Ultimately, the type of insurance you choose is up to you. In my own personal situation, I have opted for a term policy because I choose to save or invest my money in other investments that are going to yield far more than a whole life insurance policy would yield. In addition, many folks have employers who already offer term life insurance as well as disability insurance, free of charge. If you’re in this boat, then it makes sense to go with this type of life insurance policy for now.
If you are seriously thinking about getting life insurance (you should, if you have children and are married), then you may want to do some price comparisons. You can check out our article on how life insurance policies are priced to get a better idea on how fees are set. You may also want to become more educated on the language of insurance policies before investing in one. A great book for this is called Winning the Insurance Game, by Ralph Nader. You can also contact a company called Insurance Information, Inc. at 1-800-472-5800 for price comparisons on different insurance policies. This company offers great pricing information, and it works independently from the insurance companies. They can send you a free packet regarding their services to get you started.
Whatever life insurance you decide to go with, make sure you understand what you are getting. Never pay for something you do not understand.
Created Nov 11, 2010. Updated July 1, 2012. Copyright © 2012 The Digerati Life. All Rights Reserved.