Whole Life Insurance vs. Term Life Insurance
Filed Under Afforable Life Insurance, Compare Life Insurance, Life Insurance Costs, Life Insurance Plans, Term Life Insurance, Universal Life Insurance, Variable Life Insurance, Whole Life Insurance |
Many people believe that term life insurance is the best plan for them. But this isn’t true for everyone, and it is essential to analyze which type of life insurance suits you the best.
A typical term life insurance policy provides only life coverage, whereas the whole life term policy combines a term policy with an investment benefit. In the case of term life insurance, if the insured dies the policy pays a fixed amount to the beneficiary. It can be purchased for periods ranging from 1 to 30 years.
The whole life term policy would include an added investment in various options like bonds, stocks or the money market instruments.
The three most important forms of whole life insurance are traditional whole life policies, universal life insurance and variable life insurance. With any of these policies you can lock in the same monthly payment over the life of the policy.
Forced Savings
With whole life policies you are paying for the insurance as well as the investment portion, and hence they are usually more expensive. It would be sensible to pay for that extra portion if these investments were worth it, but unfortunately in most cases they are not. Certain agents like to emphasize the fact that these are retirement plans.
But actually there are many more methods to save for retirement and these policies come with huge fees and commissions that often result in you losing money. These costs sometimes reduce investment returns by as much as 3% annually.
Also adding to the burden are other upfront commissions which take up 100% of your first year premium. It makes it more disadvantageous to not know how much of your money is going towards insurance and what part of it is going to investments.
The premium that one needs to pay is significantly less for those who are in good health and are below 50 years of age. The premiums keep increasing thereafter.
However, those over 60 years old have no option other than to buy the whole term policies. Most companies simply do not sell term policies for those older than 65 years.
Whole Life vs. Term Policies - An Example
In order to get a better picture of term and life policies, let’s look at a quick example.
With an annual premium of $3,000 and an insured amount of $250,000, an investment with a 5.7% return would have a cash value exactly equal to zero.
But if the same amount were invested in term coverage of 20 years with a fixed premium of $350, which would have been further invested in a mutual fund which gave a return of 10% annually, and he would have saved $2,841 and accumulated a whole $46,000 after tax savings.
Thus the cash value of the policy would be $31,819.
That doesn’t necessarily mean that whole term policies are useless, because they can effectively be used to plan estate taxes with the returns of their policy.
Whole Life Policy
Only an expert can tell if a whole life policy is giving you a good yield or not. James Hunt, actuary for the Consumer Federation of America, has analyzed from his research and concluded that these policies result in hardly any yield unless held for 20 years more.
So in case one decides to buy one be prepared for a longer hold period. The internal rate of return on any policy can be calculated as the difference between the yield of the policy and the commissions and fees paid.
An in-depth analysis will determine if there is an absolute return from the investment that is competitive. Many financial planners could help you to calculate the return on your investments easily with a few calculations.
Retain Your Policy While Considering New Ones
In case you were wondering if you could get rid of your older policies for cheaper ones like the recent term policies, then think for a while, because your older policies actually start giving decent returns after a period of only 10-15 years. You need to keep in mind the amount that you have paid all these years.
In order to enter into any other policy you would also need to examine yourself medically to make sure you are fit. If you are over 50 years of age and smoke or have any health problems it would be cheaper to retain your older policy.
Rating Insurance Companies
In case you want to hold your insurance for a longer period, it would sensible to find a stable and sound company. Many credit rating agencies rate these companies, and it’s information you should look at before making a decision on life insurance policy.
Ratings typically range from AAA to BBB or even worse. So you would want to thoroughly evaluate this before doing any further transactions with the company. Ratings are typically based on the financial condition of the agency.
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