I use to be a hardcore, exclusive term life insurance supporter.  Honestly, it was because that was all I really understood.  Suze Orman and Dave Ramsey, financial educators I followed growing, are also strong advocates of term policies.   So why would anyone choose something other than term insurance? I believed anyone who deliberately chose a whole life policy must have been scammed by a sales insurance agent.  Clearly, whole life insurance is more expensive than term policies.  Why would anyone select this option?

The Wake-Up Call

It wasn’t until recently that I received a message from a friend that stated that her mom’s (age 70) term policy was canceled.  “What do we do?”, she asked.   I sat back for a moment and realized that I didn’t know what to do.  I never considered what happens when you can’t get term insurance.  At that moment, I was determined to find out what could be done.

Truthfully, this is not an isolated situation.  This can happen to anybody who are blessed to reach 70 years old.  It can even happen to you.  Until this moment, I had not thought about what options were available if an insurance policy cancels your coverage due to age.  Additionally, term insurance becomes much more expensive as you age that it doesn’t make sense to keep it.  So, what do you do?

Advocates for term insurance state you should purchase term insurance and invest the difference in the market.  Simple, right?  But if your parents are older and they did not follow this philosophy or if you have a health issue during your term policy and the company won’t renew, what now? What other options were available?

Honestly, it was a wakeup call for me to educate myself and this community on the difference between term and whole life products so we could make informed decisions not just for now, but for the future.

Even if term life insurance is your preferred choice, it is smart to be educated on the options and understand WHY you selected this policy.  Because “Suze and Dave said so” is no longer an acceptable answer.

Disclaimer – I am not an insurance agent or a financial advisor. Please consult with a licensed advisor to discuss your personal situation.  Also, products may perform differently based on the company.

Overview

This article will highlight the differences between the two policies and provide an overview of the different types of whole life products available.  This article is not to persuade you, but to provide information on the advantages and disadvantages of both options so you can make an informed decision.  I encourage you to be open minded and educate yourself so you can make the best decision for your family.

Personal finance is personal and there is no one size fits all solution.  One solution is clear though, having insurance is better than not having insurance so at a minimum, get coverage.

Term Insurance

Premiums & Coverage Period

Term Insurance protects you for a specified period.  Some term policies cover through age 65 while others will cover to age 71.  These policies allow you to purchase significantly more coverage with a lower premium.  Some premiums may increase incrementally over time such as every 5 years, while some policies keep the same rate for the length of the term (i.e. 20 years).

The premium is usually cheaper the younger and healthier you are. Why? Because the risk of death is lower. This applies to both term and whole life policies.  However, once your term expires, you will have to reapply again.  Your premium will increase with age and your health could be re-evaluated at the time of renewal. Even if the premiums are higher after 20 years, it will still likely be cheaper than a whole life policy.

Lastly, term policy premiums do not accumulate any cash value.  The monthly payments are solely to pay the death benefit selected.

The Justification for Term Insurance

Term insurance is obviously cheaper and more affordable for most people to purchase.  The strategy supporting term insurance is to purchase term insurance and invest the difference. The theory is that the money invested in the market will grow in an exchange-traded fund or whatever investment vehicle you choose to where you will no longer need the same level of insurance.  Consequently, you will not need to pay the higher premium prices for a term policy when you are older.

While this can be an effective strategy, you must actually invest for it to work.  According to a 2017 annual Economy and Personal Finance survey by Gallup, a lot of people don’t.

Specifically, only 54 percent of Americans invest in the market.

Whole Life Insurance

Premiums and Coverage Period

Whole Life Insurance, like the name implies, covers your entire life.  The coverage never expires unless you are delinquent in your payments.  Like term policies, whole life is cheaper the younger and healthier you are.  However, as mentioned before, whole life is more expensive than a term policy for the same level of coverage.

For example, a $500K term policy can cost $36 a month whereas the same coverage under a whole life is can be approximately $380 a month. (costs vary based on age, gender, and health)

Huge difference, right? But keep reading.

Keep in mind that your premium will never change.  So, using the same example above, if you purchased the whole life policy at age 35, your premium will be $380 at age 70.  The same coverage with a term policy could be $1000+ a month or more at age 70.

Additionally, with whole life, if you become ill during the coverage period, your premium remains the same.

Features of Whole Life

In addition to having an insurance policy that does not expire, whole life also provides a cash value that accumulates over time.  The cash value will never equal the death benefit (coverage) amount and it will take a few years to accumulate before it is available for use.

This feature is available for those who may want to supplement their retirement planning, borrow to pay for unexpected expenses, or to invest in a business.

I can hear the objection.

Insurance should not be a source of retirement planning and a person should use their 401K, Individual Retirement Account (IRA), or some other investment.

However, there are many people who do not have those accounts and if they do have investment accounts, the market could take an unexpected downturn like 2008.  In 2008, analysis reports that investors lost an average of 25 percent of their value.

Different Types of Whole Life Umbrella

Whole Life policies can fall under three categories – Simplified, Universal and Variable.  Each product may vary by company, but overall all three do not expire and build a cash value.

Simplified Whole life

The simplified policy is the most straight forward.  The premium or coverage amount does not change. However, some companies may allow you to change the coverage amount due to a major life event such as a marriage, home purchase, or birth of a child.  Anything outside of a major life change will require you to reapply for another policy to change the coverage.

Some companies also offer a 20-year payment plan versus paying for the rest of your life.  The premiums will be higher, but after 20 years, the premiums are paid in full.

Universal Whole Life

Universal life policy provides the flexibility to increase or decrease the coverage amount as needed. However, with this product, your premiums are interest rate sensitive; meaning it may change based on the interest rate.   For example, when the interest rate increases, your premium may increase as well.  The same is possible when the rates decrease.

Variable Whole Life

Like the universal policy, the coverage amount and the premiums may change, but your cash value is invested in the market.  It has the potential to grow or decline based on the investment accounts.

The Justification for Whole Life

The advantage of whole life insurance is once you have it, it’s done.  You cannot be dropped unless you are delinquent with your payments. Unlike term where you have to be re-evaluated when the term expires, you are not at risk of being denied coverage due to an illness or significantly higher premiums as you age.

The cash value is also available to borrow against when needed or cash out in retirement if desired.

Final Thoughts

Here’s the thing, people do not consider insurance until they need it and by that time it is too late.   Some insurance is better than no insurance any day.  So evaluate your insurance needs and find a reputable company (with strong financials) to protect your family and assets immediately.

Lastly, there is no law that states you have to be 100% term or a 100% whole life.  It is not a zero-sum game.  It is possible to have a combination.  The key is to evaluate your needs and get covered.

Drop a comment below to let me know your thoughts.

That’s getting your FINANCES ON POINT.