Whole Life Insurance vs. Term Life Insurance-The Straight Skinny
A common argument between financial advisers, insurance professionals, and consumers is the value of term life insurance versus whole life insurance. There are strong advocates on both sides of the debate. Some advisers believe term insurance is the only way to go, that there is no need for permanent life insurance. They claim that permanent life insurance is more expensive then term and your money is better invested elsewhere. The permanent insurance advocates will say buying term is just ‘renting’ security, while whole life provides lifetime security.
We believe in owning both products because they each serve different needs. While term insurance is certainly less expensive than whole life, this type of policy only provides a death benefit for your family for a certain length of time, nothing more. If you decide to only buy term insurance and you develop a health condition such as diabetes, cancer, heart disease, alzheimers, have a heart attack, etc. the only choice you have is to convert your term policy to a permanent policy (at a much higher rate) at the end of the term or lose your coverage. Depending on your health, you may not be considered insurable anymore, and if you are still insurable, only at a much higher rate.
Term life insurance gives you the ability to buy a lot of death benefit at a low cost; it’s an excellent way to leverage money and ensure a long lasting legacy for your loved ones after you pass. Whole life, although more expensive, builds guaranteed cash value over time that can be pulled out (in many cases tax free) for emergencies, kid’s college, supplement retirement funds, or to keep the policy afloat during tough times when you can’t make premium payments. Whole life insurance is a ‘forced savings plan’ that also provides a death benefit; it’s a nest egg asset that grows over time. Whole life historically have provided 4%-5% guaranteed returns, which sure beats your savings account giving you practically nothing and CD’s at 1%. Plus, we all know that the stock market has been incredibly volatile, especially over the last decade, making whole life insurance an excellent opportunity to diversify your money. Also, with taxes on the rise in our country, whole life can provide some tax free income. You can withdraw funds up to the amount you have put into the policy (premiums), tax free. This is valuable, especially considering most other retirement vehicles are tax deferred (which means taxes later).
We recommend owning both term and whole life insurance. The term insurance is an inexpensive way to transfer wealth to your heirs, and whole life helps to build your nest egg. The argument that you should ONLY buy term insurance is usually being made by the investment advisers that think they can invest the difference and always make huge returns for you, simply not realistic. Balance and diversification is the key, and that’s what you get by owning a combination of insurance and investment products.