If you were to purchase life insurance today, which would you buy, term insurance or whole life insurance? Why? Perhaps a better question at this point would be, do you know the difference? When discussing life insurance you should have a clear understanding of these two options because they aren’t the same. In this article, I will break down the basics about the two.
First, let’s discuss term insurance. Term insurance is, in essence, exactly what the word implies. It’s insurance that lasts for a given term. That term could be 10 years, 20, 30 years or any other block of time, depending on what the insurance company offers and what you choose. Simply put, if you buy term insurance, you will pay a certain premium for a certain number of years and when that period ends, so does your insurance.
If you should outlive your term insurance, you get nothing for the years that you paid your monthly premium. An insurance premium is the set amount you pay per month in exchange for coverage from the insurance company. For example, if you pay $40 per month for your life insurance, your total premium for the year would be $480. In exchange, if something should happen that leads to your death, the insurance company would pay out the agreed upon face value of your insurance policy.
In the case of term insurance, the insurance company would only pay out if your death occurred within the time period of the insurance policy. Let’s imagine you bought a 20-year policy on June 1, 2023. That policy would cover you until May 31, 2043. If you live until June 1, 2043, you will have outlived your policy and will no longer be covered.
So, what happens if you get hit by a bus on June 2, 2043, and you die on the way to the hospital? Well, assuming you didn’t renew your insurance policy before it expired, you, or better, your family, would, unfortunately, be out of luck. The insurance company covered you for the length of the term and owes you nothing. Using the $40 per month premium example from above, that would mean that you paid $480 per year for twenty years, which would mean that you would have paid a total of $9,600 in that twenty year period. Again, using the previous example, what would you get from the insurance company if you lived until June 1, 2043? I’d say that some time before the policy expired, you would probably get a notice or a phone call from the insurance company telling you that your term insurance was about to expire and that you may want to consider re-newing it.
Of course, you would have the option of renewing the policy for another twenty years, but this is where term life insurance may leave a bitter taste in your month. Let’s assume in the first example that you were 35 years old when you first purchased that 20-year term life insurance policy. Let’s also assume that you had no major health issues at the time. Being less than 40 years old and in good health works in your favor when you buy that 20-year policy.
Twenty years later, you would be 55 years old and perhaps not in such great health. Because of these factors, the insurance company would consider you a greater risk than when you were 35. In turn, if you were to request another 20-year term policy, you could see that policy double, triple, quadruple or more in terms of price. Would you be willing to pay $200 for a policy that just twenty years previously you paid $40 for? The choice is yours.
Another thing to consider when you think of purchasing a term life insurance policy is that, according to a study conducted by Penn State University, 99% of these term life policies never pay out a benefit, usually because the vast majority of people outlive the term. Perhaps you should go back and read it again. It is an oft cited statistic used in the insurance business.
Don’t get me wrong, I would never tell anyone not to purchase term life insurance because, depending on where you are in life, this type of policy could serve its purpose. If it’s pure insurance you want, this is what you want. On the other hand, if you feel as if you are wasting your money because the benefit will only be paid out in the event of your death, you may want to consider the other option. Notice that I didn’t write that you will only receive the benefit in the event of your death. There’s a reason for that and that’s because you won’t receive anything. Only those taking care of your final arrangements will receive something. You’ll be dead.
So then, what’s the other option? Well, now it’s time to discuss whole life insurance. Similar to term insurance, the meaning of whole life insurance can also be understood by simply considering the name. While you pay for term insurance for a certain term and it covers you for a certain term, with whole life insurance, you pay premiums for your whole life and you will be covered for your whole life.
And what are the advantages of whole life?
Well, with whole life, not only are you covered for your whole life, but you also build up a cash value within the policy. With this cash value, you can borrow funds from the policy and use it for just about whatever cause you so choose. You can pay back these funds or choose not to. If you choose not to, the amount that you took out will simply be deducted from the total face value amount of the policy.
Sounds good, right? So what’s catch?
As whole life insurance builds up a cash value, you must fund it and to fund it the premiums will be much higher. I’ve seen whole life premiums in which the policy owner pays 4-10 times more than a term insurance policy. Is it worth it? That’s something for you to decide. Again, this will depend on where you are in life and how much value you want in the policy.
Nowadays, many black families are considering the possibilities of building generational wealth with whole life insurance policies. This is an intriguing concept as, for decades, black families saw life insurance as only necessary to give family members a decent funeral. I won’t delve into this in this post, but before you make a decision about whether whole life or term insurance would meet your future goals, here are a few important factors you might want to consider:
1. Your age
2. Do you have a spouse or children?
3. Would you like to replace your salary in the event of your death?
4. Do you have a mortgage?
5. Do you only want enough money to cover your burial arrangements?
6. Would you like to pass on this money to your children after your death?
These are just a few things to consider when you’re thinking of choosing term or whole life insurance. There are actually other factors, but these few will give you an idea of a few of the things you might want to consider when making your decision.
I will be exploring this more in the future, but consider this article your introduction to the discussion or debate on term vs. whole life insurance.
If you’ve already made up your mind, live in Michigan and want to get some quotes, contact me here.