Term and whole life insurance policies are amongst the most popular policies issued to people today. Term policies basically cover a fixed span of time such as twenty or thirty years. Whereas whole life policy covers not only the term of the policy which is your entire life but also any interest that has accumulated on top of it.
Term & Whole Life. In term life policies, there are two types of premiums: level term and annual renewable. The level term remains constant for the whole term of the policy and can be bought in increments up to thirty years while the latter increase its level of coverage as you age. On the other hand, the whole life policy has two elements: the mortality charge and the reserve. The mortality charge is the amount paid for insurance and the reserve denotes the investment component that earns interest.
But, Which One Is Best? While everyone’s situation is different, the best type of insurance policy for most people is definitely term policy for a host of reasons. The term policy is life coverage only and upon death the beneficiary receives a face value of the policy. The whole life policy on the other hand provides you with cash value that you can borrow against that accrues the longer you own the policy.
Costs. Overall whole life policies are a much more expensive route than term policies. I can remember that my wife and I were quoted something like $100,000 whole life policy with an investment portion that was going to cost over $100 a month. But, we ended up buying a level 30 year term $500,000 policy which only costs us somewhere in the neighborhood of $70 a month! Crazy, right?
Good Investment? No! Where it seems that saving more money in its investment portion is good for the long term, it really isn’t. The rate of return for most policies is small, in the range of 2% to 3% which will barely keep up with inflation. There are better investment opportunities than these available, and thus they can be qualified as forced savings.
High Commissions. These policies also come with high fees and commissions, with their typical commissions which can be as high as 100% of the first year’s premium. This is one of the biggest reasons that commission based financial planners push these insurance policies. They make them the most amount of money and cost you the most which is never a winning combination for the consumer. These hidden costs and expenses are what make the term policy look better in front of the whole life policy.
Your Need. With whole life insurance policies, you own the insurance for your entire life until you die. But, you may not need insurance later in your life. What income are you protecting for your family to live on if you are 70 years old and retired? A twenty year old who buys a thirty year level term policy will see his insurance coverage ending right after his kids may theoretically be grown and gone off on their own. That’s the perfect time that you do not need coverage.
Whole life policies are not always bad. If you’re wealthy and want to employ whole life in your estate planning, the policy can actually prove to be beneficial. Also if you’re prepared to wait for the long haul to your premiums returned to you, whole life policy may be a good option. But, for the purest form of coverage, term policies are almost always a better option for most people. They cover death benefits and can usually be renewed depending on your health. Where the time limit is a lot shorter or where there are young families with large financial obligations, time policies should be invested in. They’re substantially low premiums allow them to purchase enough coverage to protect against the loss of income.