It is important to weigh the pros and cons of Term vs. Whole Life insurance policies and what they offer. Most of us understand the necessity of having sufficient life insurance coverage to protect our family's financial well-being should something happen to the breadwinner(s) of the family. There are many decisions to make when considering which life insurance policy to purchase given one’s financial needs. Choosing the correct type of policy is every bit as important as the dollar amount of the policy.
Simply put, Term Life insurance offers the policyholder coverage in the event of their death to be paid to the named beneficiaries on the policy. The amount paid will be the face value of the Term policy. Virtually every insurance company offers terms ranging from 1 to 30 years. Term insurance is generally the cheapest form of life insurance if the policyholder is in good health and under the age of 50. After 50 years of age, Term Life insurance becomes progressively more expensive and most companies don’t offer coverage to those aged 65 and above because of the inherent risk.
Whole Life policies vary from Term Life policies mainly because they combine the term insurance component with an investment component. The investment portion of a Whole Life policy is generally held in stocks, money market funds, and bonds and therefore has the advantage of building cash value during the term of the policy. In most cases, policyholders have the added option of borrowing against the policy should they choose to do so.
The primary disadvantages of the Whole Life policies is that they are much more expensive than their counterparts because of the investment component and they obviously carry a certain amount of risk tied to the performance of the financial market’s performance. Additionally, these policies have higher fees and commission rates tied to their premiums, which can account for nearly 3% from the average return on the policy. It’s important to note the advantages of the Whole Life policies are the potential for substantial financial gains and when used in estate planning, Whole Life insurance can be part of a trust to pay estate taxes from the proceeds of these policies.
Let’s examine the costs of Term vs. Whole life policies: A $500,000 Term policy for a healthy 40 year-old non-smoking male would run approximately $355 annually. By comparison, the same coverage under a Whole Life policy would start at around $6,000 per year for the identical 40 year-old male. The prices rise depending on which kind of investment component you consider adding to the policy. For most of us, this huge price disparity would probably be the biggest consideration when deciding which type of coverage to choose.
When weighing your life insurance options, it’s paramount to consider how much coverage your family will need to maintain their current lifestyle. It’s also important to consider which type of policy will work for your family and what you can afford to pay right now.