Life Insurance Term vs whole Life

The “terms” used to define when speaking of life insurance are very interesting. Term life insurance, which is bought for a term, or a specified period of time, is called temporary insurance, or rented, or any other such name which denotes a lesser value for whatever perceived reason. Whole life insurance builds cash value over the full time that the policy is in force. This is called Permanent Insurance, once again, building an impression which may not hold true.

Before defining further terms of life insurance, let’s discuss the mission of life insurance, why it exists, its true purpose. Life insurance has often been called a bet, but now people are realizing that it is a hedge. For either term, a family provider realizes that young people die, and it could happen to him. Why do we need life insurance at all? Well, why do we need money at all? To buy the things we need, as in food, clothes, college funds, etc., all in the name of providing for our family. Now an important question is: If I die, how will my family be provided for? Life insurance is that hedge that provides a cushion for the bereaved families to be able to stay afloat in the face of the husband’s and father’s death. Who provides the income then? The company you work for only has one income for the position you hold, and someone else will fill those shoes fairly soon. Your income must be replaced by having the life insurance estate set up, especially more than at any other time, during the early years, from wedding to college days for the children. Once all the children are through school and out of the house, you should have also saved significant sums of cash in your IRA, 401 (k), or other retirement funds that will provide for your living expenses in old age. Meanwhile, you should have other savings, including emergency funds and other funds for short-term goals in order to procure those things you wish to enjoy in life. By this time, there are few examples of citizens who need a lot of life insurance, since they now have the cash to provide for their estate. Good investments can be made, and with decent returns, may provide a permanent income while you decide who to will that cash to, whether a college or other charity, a church, or some other good cause. With these thoughts on your mind, knowing you will need money to save in your investments, should you buy term life insurance, which is normally eight to ten times less expensive than whole life at the same starting ages? Then, investing the difference would only involve multiplying your monthly premium by seven (7), which would then be the amount of money to save for long-term and short-term goals. The hedge of insurance protects your income for a number of years, and it enables you to build up cash when and where you need it.

Whole life insurance is called permanent insurance because it remains in force, (and payable), for your whole life. Modified forms of this type of insurance include endowments to the age of 65, or even endowment at age 45. These cost even more that the straight whole life insurance did. All of these policies build up a cash value, normally endowing the policy when payment permission. But soon, the secret would be told by an old man who couldn’t hold back anymore. You have to borrow the money to use it, and you have to pay it back at some point, with interest. If you do not pay it back, the loan amount and accumulating interest are taken out of the death benefit at the time of death.

Is whole life insurance a suitable investment? Not if you ask the U.S. Congress, which has said that whole life or cash value insurance is not a suitable investment for IRA accounts. They recognize bank accounts, credit unions, mutual funds, (even those in “risky” stocks), and corporate and government bonds as good investments for IRAs, because “those investments all carry with them the possibility of a good positive return.” Cash value insurance advocates state the forced savings aspect of the policy makes sure something will be left for those who cannot save money through disciplined decision making. But keep in mind that when an insured dies, his heirs receive the value of the insurance only, with no additional cash value. If anyone wants forced savings, they can use the Roth IRA. Nothing may be withdrawn for the first five years, so once that bank draft has been made, no one can force it out of their hands.

Typically, a healthy male at the age of 35 can find term life insurance over twenty years to cost around $35.00 per month for $200,000 in coverage. By not spending an extra $295 per month on cash value insurance, he could then invest the $295.00 per month at a good return, say 10.8%, and within twenty years, his estate would be worth $248,709.91. A cash value policy at this point might be worth $68,000. One provision of the cash value is the ability to cash in the policy completely for the value, but then, the insurance is cancelled. I’d like to believe that our young graduate, upon seeing these terms, would rather live with $248,000 than $68,000. The tax argument might come up at this point, but not if the Roth IRA is involved. Non-taxable for life, this $248,000 could produce a permanent income of over $2200; as long as the return remained at 10.8% and the $248,000 is untouched, that check for $2200 can keep on coming, month after month.

To further this scenario, suppose the guy with the term insurance cancels his policy. Now, he would be able to invest $330 per month. After ten more years at a return of 10.8%, he would have $655,976.47. This could make his permanent income grow to $5,903.79.

Remember, the guy with the $250,000 policy will always max out at the amount of the death protection. One exception may be given below.

One other feature of the whole life protection is that if one discontinues paying the premiums, there are provisions to make sure you keep something from them. The two common options are automatically loaning the premium to the policyholder for the payments. But at a five percent interest rate on the loan, this can only go on so long, with the entire loan balance reaching the insurance level in a few years. The other option, reduced-paid-up amount figures how much insurance you can truly keep at a permanent level, given what has been paid in so far. This amount is usually less than the current cash value, and in this case, would likely be at a level of about $49,000. So, if this policyholder took this option, he would have a death benefit available of $49,000 for the rest of his life, without another payment. Now, this policyholder could take a page from our investor’s book, by keeping the reduced-paid-up amount at $49,000. So now, he could invest his money $330 per month, at 10.8% for the next ten years. He now has $70,784.56 in his investment account, and $49,000 worth of insurance upon his death. That totals up to $119,784.56. Not quite the $248,000 of our term and invest example, but better.

Wait, you think, couldn’t this guy have cancelled his entire policy for the cash, as you say above in the article? Well, yes, of course. But insurance companies want to keep that money, so they convince us that “free” insurance will work better in our case. But if this investor could now take out the $68,000 in cash, cancel the policy, and invest the $330 per month, in ten years, even he would have $270,057.75. He still won’t catch up to the term buyer, because he has built his estate to $655,976.47. But he is still better off with a total saved now of over $250,000, which is the highest he could have ever expected from that policy.

The choice seems fairly simple this way, yet then, people want to gore the “bad markets” like the one we have experienced in these days of 2008-09. For 65 year-olds today, it was 1973-74 when they were 30. Another is 1957-58. So what is the pattern? Seemingly, the going number is 8-2. Every decade seems to have two bad years within it, but eight good years. Remember 1990-91? That was truly shorter, lasting about the last five months of 1990 and one month into 1991. The year 1991 is fondly remembered by most mutual fund investors of that time as the best year ever, with returns at 21-35% for the average conservative growth fund.

History proves that investing is better than owning life insurance. Getting just enough to cover your income is the important part. Invest the rest of your money into good investments. Leave the “permanent insurance” to those who deserve to have it. And if you’re asking yourself why someone can call life insurance “permanent” when life itself is not permanent, keep on thinking, “Good question!” How, indeed!