Life Insurance 101 – Whole Life Vs Term Insurance
If you are even considering to buy life insurance do you have the hardest time when it comes to deciding on Whole Life vs Term Insurance?
One life agent named Vicki Gunvalson (not affiliated with our organization) vaguely states…
“The difference of term to permanent. I think that term is being sold to a lot of clients under age 40 where I try to talk more permanent coverages when over age 40 with more on the estate planning side where it is something they want to have for their beneficiary’s benefit when they are an age 100.
So with term we could obviously only go 20 to 30 years but when we’re looking at 40-50 year olds I always talk to them about permanent coverage.”
In contrast to what Vicki states we wholeheartedly, wholeheartedly believe that no one should purchase anything other than term life ins. When you have an agent trying to sell you Whole Life, Variable Life Insurance or Survivorship Life Insurance then be extra cautious with this life insurance agent because they may be looking at their own interest and financial gain rather than you and your loved one.
Whole Life vs Term Insurance
Permanent Insurance, which includes Whole Life, Universal Life, Variable Life and Survivorship Life insurance has a built in “Cash Value” but when you understand that the cash value really means nothing to your bottom line you will never think about purchasing any of the types of permanent ins.
Cash Value is the “investment” portion of life ins that you can access through loans or withdrawals. The death benefit may be reduced with the withdrawals and there may be some charges which could affect your policy in the future.
Also, you definitely do not want to have life coverage forever. If you understand how expensive continuously paying into a life policy can be you will definitely rethink this purchase. At age 100 the cost is $1000/month for every $1000 of coverage. So if you have a $500,000 policy it will cost you $500,000 per month at age 100. You only need it when you are younger and when you have dependents counting on you for your income. Outside of that temporary time period you do not need this coverage. Again, it is only for a temporary period of time.
Insurance agents that tell you the benefits of cash value either don’t know how bad a permanent insurance policy is for you or they don’t but chances are they know how much commission they stand to make from selling one of these whole life policies to you and have chose that route instead of looking in you and your family’s best interest.
What? Do you mean I get to invest with a life policy? Isn’t that wonderful?
Yes, there is an investment portion to these permanent life policies but in reality the cash value is never really yours. It’s the insurance company’s money and they will allow you to borrow from it. They will tell you that you can borrow from it to pay for your children’s college expenses, medical expenses, emergencies or for retirement. But you must pay the funds back with interest to the life ins company.
Borrow and pay back my own money with interest? Are you kidding? Isn’t the cash value my money?
Sorry to tell you but it is not. Until you cancel the policy you are paying an enormous premium into an investment + life ins that you don’t have control over. It’s really the insurance company’s money. Also, the investments that they offer you are very limited and they make additional commissions off of the investments that you choose because those investments whether mutual funds or money market funds are held until the insurance company you purchase your policy from. You have a limited number of investment choices and they may not be the best funds to choose from either.
If the life agent, after trying to push whole life / permanent insurance onto you then switches to term insurance and tries to sell you that type of life ins just leave the office. Do not deal with them any longer. They tried to push an insurance product onto you that was not in your best interest and now have to resort to selling you a lower commission product.
Term Insurance and Savings You Will Have
Term Insurance is pure insurance without the investment portion. The amount of money that you save purchasing a low cost term life policy is huge compared to buying a whole life policy. NOW take those savings and put it into any investment (mutual funds, stocks, bonds, money market) of your choice.
YOU CHOOSE what investment you want for yourself OUTSIDE of the life company. KEEP YOUR INVESTMENT AS FAR AS YOU CAN AWAY FROM ANY INSURANCE COMPANY.
You control it. You manage it and make withdrawals whenever you please without “borrowing” from it as you would from a Whole Life Policy / Permanent type policy.
So forget Cash Value! It’s a shallow way for the life insurance company to try to get you to give them a larger amount of commission. Be careful when dealing certain agents as they may try to convince you that you are buying term and later tell you that you can add a savings plan or investment portion with the term policy. Best rule of thumb is to keep any type of investment away from your policy. Have FULL CONTROL of your money when you separate your life insurance and your investments.
Whole Life Insurance vs Term Insurance
Other phrases they may try to use:
- Whole Term Life Ins
- Whole Term Ins
- Permanent Term Life Ins
- Term Life Insurance Cash Value (Just another phrase to get you to purchase whole life)
- Variable Term Life Ins (Another phrase to get you to purchase whole life)
We fully support Suze Orman’s stance on Life Coverage. She tells it like it is without any fluff when looking at Term Insurance vs Whole Life Ins.