Whole Life Insurance: Whole life insurance spans an individual’s entire life and may offer cash value. It is sometimes referred to as “permanent” insurance.
Term Life Insurance: Term life insurance provides coverage for a pre-defined period of time and premiums are generally fixed for that period. Depending on the policy, the death benefit may remain the same for as long as 30 years.
Each type has their purpose and conditions under which they fit best. Below is a description of how they function in practical terms to help you in your decision-making process.
Let’s use the case of a 40-year-old man in perfect health who wants a $500,000 policy with level annual premium payments. For a young family man, term life insurance will provide a bigger death benefit for a better price than whole life. But by the time our 40 year old reaches age 70, a 30-year term insurance policy will end. That’s also when term life policies start becoming prohibitively expensive because of the insured’s age, and typically, declining health along with the increasing probability of death.
A traditional whole life insurance policy purchased at 40, keeps the death benefit in force beyond age 70, as long as premiums are paid. Whole life premiums are expensive, though: $6,760 per year vs. $660 annually for the term policy for our 40 year old. But the “excess premium” goes to guaranteed savings, which builds cash value over time.
Another option is to purchase the 30-year term policy and each year invest the difference between the whole life and term life premiums in a conservative investment vehicle of your choice, say 10-year Treasury notes. Assuming that the current 2.17 percent 10-year T-note rate remains level, the T-notes can provide a higher return on your money vs. the guaranteed return whole life policy return. But under this scenario there would be no death benefit past age 69. So one value of whole life is the continuing death benefit for your heirs while you continue to build cash value.
So which way to go? The only sure answer is: if you worry that you won’t be able to maintain those high whole life premium payments for even a few years, buy term insurance instead. This mixed bag of potential benefits and costs is very complicated for consumers to navigate and professional help is always recommended.
The experts at Freedom Insurance are here to help you make these difficult decisions. Give them a call today. You’ll be glad you did!