Life Insurance

Which is Better:

Term Life or

Whole Life Insurance?

Term life insurance covers the insured for a designated period of time (10, 20, 30 years for example).  Whole life is permanent insurance.

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The Difference Between

Term vs Whole Life Insurance

Did you know there are two types of life insurance?  

Let's discover and explore the two types.  The two most common types are Term and Whole (Permanent) Life Insurance.

I have extreme feelings about whole life which I get into more depth on DollarOtter.com but know that term is as it states “Term” because it is for a particular set of time such as 10-year, 20-year, etc.

Premiums are typically cheaper for term than whole life.  This is because of whole life charges for two things: life insurance and cash value.  Because it has two pots of funds, it is more costly, but you are covered until one’s death, typically.

The problem with whole life is that while it may have a “Cash Value,” insurance companies will penalize you if you try to touch the money within a particular time frame--usually seven years.

And if you touch the money, the company penalizes you.  This is like walking into a bank to get your own money out of your savings account.

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When you kindly ask the banking manager that you would like to withdrawal $5,000, how would you feel if the manager said to you, “If you touch this $5,000, then I will tack a 3% penalty on this plus you will have to pay taxes on any gains you earned on it.” 

 

 

You would never put your money into that bank — same concept.  The beneficiary might receive the payout upon your death; however, there is so much red tape and bureaucracy on such life policies.

If you had a $200,000 policy and the cash value was $160,000, then you are not receiving $360,000 but rather one of the other. 

 

Basically it is your money from the start and you just paid the insurance companies to hold it at ridiculous rates.

With term, you pay for coverage for a specific period and my recommendation is to invest the difference in a mutual fund, IRA, or something similar that can go towards your retirement.

 

Term insurance


Term assurance was the original and first form of life cover policy and has been a product offered by insurers for well over 100 years. Romans were one of the early writers of life insurance policies.  It was a form of security for their troops to help pay for funerals as well as assist the surviving family.

Term cover policies are still a common form of life cover as in most cases a term life policy will be the cheapest form of life cover on offer.

You will often Dave Ramsey, and Suze Orman recommends such coverage.  Even some companies such as Primerica, only offer term coverage.​

Term cover will offer a substantial payout to beneficiaries in the event of the policyholder's demise. But does not have a cash lump payout to the policyholder at his or her retirement as with many whole-life deals.

For this reason, in most cases, the premiums paid for term life cover will be substantially cheaper the whole or universal insurance policies.

I recommend GetEthos.  With affordable rates and superb customer service, you can get a quoted price in under 10 minutes for most prospective customers.

Whole life insurance

Whole life or universal policies are a newer form of life cover. They are offering the policyholder as with term cover a large payout to his or her designated beneficiaries on the policyholder's death. Which is best, term or whole life insurance?

​The answer to which is best, term or whole-life insurance, is not straightforward. If you are looking for the cheapest form of cover and keeping your monthly premiums to a low, then a term life insurance policy will almost certainly be your choice.

Whole or universal life is a more expensive form of policy, which also has a cash payout at retirement.

Common Terminology

Term Life is considered temporary insurance, hence the name “term,” because it provides coverage for a designated time.  For example, term life insurance may provide coverage for ten years, 20 years, or 30 years.

The
death benefit is the amount paid as a result of an untimely death.  For example, if you purchased a $250,000 life insurance policy, the death benefit is $250,000.

Insured is a term describing who the policy covers.

4 Types of Term Life Insurance

 

There are four types of term insurance, and each one should be reviewed carefully to determine which policy best fits your financial circumstance and household needs.

1.  Level Term - This type of term life means the coverage/death benefit will not change over the period you have this policy.  For instance, if you purchased a $100,000 policy for ten years, paying $30 a month, the $100,000 and $30 premium payment will not change during the ten years.

2.  Annual Renewable Term - The death benefit and coverage remain the same over the time; however, each year the premium gradually increases. For this example, we are assuming the same $100,000 death benefit for year one is $30 per month.  Next year, the premium increases to $35 per month and is based on the insured’s age.

This type of insurance isn’t recommended for long periods but rather a customer may be interested because according to Amy Danise of Nerdwallet.com, “he or she wants to cover only very short-term debts, or is between jobs and anticipates buying group life insurance through a future employer.”   

3.  Decreasing Term - The protection or coverage will decline each year.  For example, if you purchased the $100,000 coverage, the following year, the coverage may decrease to $95,000.  

You might be thinking to yourself, “Why would anyone get this coverage?”.  It is a great question, and the answer is simple. If you are financially secure, you probably don’t need a life insurance policy.  So if a family was utterly debt-free, had their retirement and children’s tuition take care of, but may just $100,000 left on a mortgage with it being paid off in ten years, then a decreasing term is appropriate.  This insurance protects the family until the mortgage is paid off.

4.  Increasing Policy - This policy has an increasing annual coverage. This is most common among Group Life Insurance and businesses because as business hire employers, their employers will earn more income over time.  This allows the policy to keep pace with the employees’ pay. It is protection for the company if you will.

Risk Factors

Some companies will allow you to get a quick quote based on some health questions.  For instance, State Farm has an Instant Answer Term Insurance feature, that provides you a quote within a few minutes of answering some basic questions.  You will notice that most of their Sample Rates are based on young females. This is because rates are significantly lower for young females compared to males so just recognize your rate is likely to be higher than what is presented.

 

I recommend you steer away from quick quotes and have the insurance company pay for the lab testing because you can get a more appropriate and accurate quote and the insurance company won’t have any leeway to decline paying coverage in the future in the event of a death and some unknown loopholes.

 

Because you may need to undergo a basic medical examination such as blood lab draw and answer important health questions, there is a risk of your health information being stolen by online hackers misplaced files.

 

The public saw this come to fruition in 2007 when celebrity George Clooney’s medical records weren’t kept private leading to “the hospital suspending 27 employees for a month without pay for violating Health Insurance Portability and Accountability Act (HIPAA)"

 

You are protected by the Healthcare Insurance Portability and Accountability Act of 1996, also known as HIPAA, which is designed to protect the health information of clients but ask your insurance agent what measures do the company take to secure your protection of information.

 

Agents usually try to collect only what is necessary to complete the policy but most are required by their company’s policy to have a password protected folder (encrypted) to secure the information.  This will help to reduce the exposure of your health information.

 

Ask your agent how he or she protects your information.  Is it company policy to lock the files in a storage room or a desk?   If he or she emails you with information pertaining to your health records or medical information, the email must be encrypted.  

 

Should your information be disclosed by the agent to another party, he or she cannot disclose unless you have signed a Non-Disclosure Agreement.   

Characteristics of Term Life Insurance

 

One of the great benefits of having term life insurance is this type of insurance is considered to be “pure protection” meaning there is no savings account or cash value built into its coverage.  It is a benefit because you are getting the right insurance coverage and the death benefit will be paid upon an untimely death.

A key characteristic of Term is its Death Benefit.  This is the payable portion to a beneficiary upon the insured passing away.  “Most life insurance policies pay out the death benefit as a lump sum.”

There is no cash value in Term Life Insurance, unlike Whole Life Insurance.

You must determine how long you will need the policy.  This is called the designated period or length. We discuss how to calculate how much need below but in the meantime, let’s explore what happens when the policy expires.

While a policy with a term contract expires, you have two options.  A policyholder can “renew” or “convert.”

A Renewable policy allows the policyholder to add more time to the term contract.  For instance, if you purchased a 20-year Term Life, in 20 years, you can renew it.

With a Convertible policy, at the end of the 20 years, you can convert it to a permanent policy, also referred to as Whole Life Insurance.  

Both of these renewals will be based on your age at the time of renewal or conversion.  This could lead you to pay higher premiums down the road when it is time to convert or renew a term policy.  That is the disadvantage; however, you will not be required to provide proof of insurability which is an advantage because you cannot be denied for having health issues.

Calculating Life Insurance Needs

There is a misconception that you should only buy enough life insurance to cover the funeral expenses and some medical bills.  There are some majors concerns with this proposal. The first is the amount of additional financial stress one puts on a family as they already have to battle the grieving period and arrangements of the funeral.  

Next, this leaves the family in a terrible financial situation.  Not only must they fear to have to move out of their home if the passing loved one was the primary income earner, but now the income has drastically reduced, and the other spouse is expected to pick up the tab.

To correctly calculate how much insurance you will need, you must consider the following factors:

  1. Estimate funeral costs

  2. Amount of debt to pay off (mortgage, loans, credit cards)

  3. Do you want to have your children’s tuition paid?

  4. Do you want to leave retirement money for your spouse?

Total these numbers up, and this is the coverage or death benefit you should strive to purchase.

If you are single and young with no debt, then locking in a low monthly premium for 20-to-30 years will significantly benefit you and your future spouse.  As you know, the older you get, the higher the premiums will be so locking in a lower rate today is highly beneficial.

 

There are tools and resources available on the internet to help you navigate how much you should buy.  I recommend you visiting InsuranceScored.com

The Need for Life Insurance

 

Having life insurance built into your financial planning is vital to the protection of your household.  Let us think of an unfortunate circumstance occurring in the family as we did above. The primary income earner passes and now the remaining family members will be forced to adjust their standard of living.  This usually means the family will be required to sell their home moving into a smaller house and the widow having to get a job or in some instances a new job.

Life insurance delivers a benefit to reduce such stressors.  If the family had a $750,000 death benefit in our scenario above, the widow could use that money to pay off the mortgage and any remaining debt, put aside money for the children’s college tuition, and have money to put away for his or her future retirement.  

You can quickly see the importance of having insurance in place because not only does it drastically reduce the stressors and life-altering changes a family must make, but it allows the family a better chance for financial success.

Putting your family’s interest with a proper financial plan is the primary role of any household leader.  Life insurance is currently at a 50-year low according to LIMRA.  Take care of your family and help them financially succeed so in the event you or your loved one passes, the money will be the last thing to stress them out or worry. 
 

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