What is the difference between whole and term life insurance?
Is the amount of time each insurance policy lasts the only difference or are there others? Does age play a role in determining which one is the best type of life insurance for me and my family?
Term insurance has a specific term period usually not more than 30 years. It is the least expensive and does not have a cash value at the end of the term. It simply stops. Whole life falls into the category of permanent insurance where there is a sub account of investments. All forms of permanent insurance ( Whole, Universal, & Variable Life) have a sub account of sorts. The thought is that as you save money in excess of the insurance cost and eventually the cash value will pay for the insurance cost in the future. This is generally a bad idea for the vast majority of Americans. You are typically much better off saving in a more efficient resource and buying the term. Remember that insurance is a contract of indemnity and it is there for the sole purpose of replacing a loss. It is not an effective vehichle for savings.
The proper use for permanent insurance is most often with high networth individuals. There are various estate planning and business succession planning strategies to mitigate estate taxes and ensure proper asset transfer where permanent insurance is required, as the insurance must last the full duration of the individuals life to work.
If you don't think you're not in the high net worth category but may be one day then consider the convertible term policies. They offer the same term rates with the option to convert the policy in the future to a form of permanent insurance should this be needed. If not you simply let the policy expire as you would any other term insurance. If you choose that route, make sure the agent gives you the illustration on the pre-determined cost of what the insurance premiums would be upon conversion. You don’t want to have such a situation develop where you may need such a feature and find out later that the conversion rates on coverage are double the industry norm. Don’t get sold on the guaranteed renewable term. They usually will not guarantee the rate of renewal and may increase premiums by 300-500% at renewal without another health evaluation.
Also consider the permanent insurance as a Long Term care substitute Many new policies will offer a rider that will draw against the death benefit for LTC Coverage whereas something is guaranteed. With ordinary LTC policies your prem is simply lost.
Thanks for such a detailed answer. I am definitely going to have to study this further as well as take a second look at the life insurance policy my husband has through his employer. This is complicated stuff.
Be careful with group insurance. It is almost always a permanent policy. It needs to have a portability feature. It's cost is often heavily subsidised by the employer. When you leave your job you will bare the full brunt of the premiums.
@LandmarkWealth this is an incredibly detailed and easy-to-read answer to a complicated question. HubPages is lucky to have experts in fields like this who volunteer to answer questions in their area of expertise.
@Ari Lamstein I could not agree with you more. LandmarkWealth is both generous with his time and knowledge. He has a very valuable portfolio of financial hubs as well that I have only just begun to read.
Thanks, I appreciate the compliments. I have recently discovered writing to be a form of stress relief. I wish that I had another field of expertise to write about. Perhaps I could write a hub about sitting in traffic in Long Island...LOL.
You may look at this as a singular area of expertise but the financial planning topics you could write about go beyond insurance (i.e. pros and con of leasing a car vs buying, etc.) Any financial advice from someone with credentials is valued.
Interesting thought, most of my writing is related to investing in one for or another. Yet often I have advised clients on other forms of financing on just that topic of purchasing vs leasing. I will have to add something like that to my list.
If you need long-term care insurance, get long-term care insurance. Whole life policies are horrible even for life insurance. Why would you buy whole life insurance for estate tax purposes, pay for it and have "the benefits" evaporate for LTC?
There not horrible when you inherit your partners spouse as your new business partner with no idea how to run the company because he was too old to be insured by term and you don't have the liquidty to buy her out.
A well thought out partnership agreement or "planning ahead" would be the answer to that problem, not Whole Life. In the meantime Term Insurance would do. Calculate the numbers, Whole life is trash in every way.
Parnership agreements dictate terms not funding. Not all business have the same liquidity available. I have drafted literally hundreds of these, and the numbers work quite well. Especially in the current interest rate environment.
Yes the partnership agreement does dictate the terms and the succession. Yes not all businesses have the liquidity, but that should be the goal then. If the partners are insurable term beats whole life any day. The premiums on WL are ridiculous.
The cost of insurance is actuarily the same, it's the cash build that is different. There is no obligation to build cash. I currently have a VUL on myself for 1.2 million and the insurance prem is $1560 annually, comparable to a term.
You are not comparing apples to apples, in the VUL you probably have an annually increasing term policy.
Ofcourse I do but its a nominal increase every 5 years, and no more of an increase than guaranteed renewable term over same duration of time in total cost and I can terminate at any point yet much more estate flexibility, If I choose the cash pays 5%
That the 5% is probably not guaranteed.And you probably have to have some sort of minimum in cash value to keep the policy in force. An NO the prices are not comparable, you are better off with a level term and investing the difference.
The 5% is a GIC with a contractual floor of 3%. Quite guaranteed. The premiums are equal over the next 30-40 years of a guaranteed renwable term policy. They don't begun to get hefty until the point at which the term would no longer cover me anyway
Here is a layman's answer:
TERM life insurance pays IF you die within that time frame.
WHOLE life insurance pays WHEN you die, regardless.
That's how it was explained to me once, although it is a bit more complex than that. It is further complicated by hybrid-type accounts of all shapes and kinds offered by creative life insurance companies these days.
So then it sounds like term life insurance might be good to have if you have a family dependent on your income.
Term is the best for nearly everyone. Just keep in mind that insurance proceeds are income tax free but NOT estate tax free if you own the policy. This is were many people have larger potential estates than they realize.
So then what is the downside to having a larger estate than you realize?
Taxes if you don't title the policy correctly.
Insurance companies don't work for free, having a term policy while you make sure to get enough assets that are liquid to pay the estate tax is the best way to go. Being dependent on the insurance company to pay your estate taxes is a BAD idea.
That's hardly true and no reputable estate attorney would agree Most high net worth people never pay the tax with the proper planning and still build sizeable investment portfolios Your approach is more desirable for the middle to lower income range
@Landmark, your statement "most high net worth people...", is interesting what survey, poll, or study is that statement based on? Or is that an opinion? The truth still stands, the fees on WL insurance are insanely steep.
15 years of financial planning exp with high net worth clients, Studies completed by the CFP board, FPA & NAPFA. The cost of insurance is the same. You're confusing the cash build which is not required in many policies.
Funny how other studies point to the exact opposite. Having read about the problems, I am 100% convinced that it is best to avoid it. Countless families have been screwed over by "reputable professionals", and in the end CASH is ALWAYS king.
Studies point that out for most Americans. Again not hign net worth complex cases that require complex tax planning. There are plenty of commission brokers selling funds with sales charges and screwing clients, doesn't mean investing should stop.
Term has a set amount of time it is active. Whole life will be there the rest of your life.
The people who have answered gave good enough definitions, but here is something to consider, term life insurance premiums will change at the end of the term. Here is an example:
you are 20 and get a 20 year term for 200,000 grand. cost 17.50 a month, cheap cause your chances of dying are not that large, neither are your chances of completeing the term actually.
But lets say you complete the term and are 40 now, that same 20 year term could cost alot more, say 135 a month, cause your chances of dying are higher, you might have health issues ect. and when you are 31 lets say you have a cancer scare, but you have been in remission for 9 years, you might not even get covered, they may refuse because your too high a risk.
Then when you turn 60, the premium will be even higher.
Whole life on the other hand, the premium will not go up. The payment you have to give will stay the same, and it's cash value could allow you to not pay a few months if you hit hard times. It will cost more when your younger, but will cost far far less when your older. And you can borrow the cash value, like mentioned earlier it isn't an ideal savings vehicle, but to say that it isn't useful is almost insane. If you have had the policy for years, and you need a quick 5k loan, if the cash is there you can't be told no, the interest rate will be dirt cheap, and most of the interest your paying yourself anyways. Also if you overpay you can get to the point where the interest from the cash value pays the premium every month meaning you don't need to pay your premium anymore, ever.
Your examples of how the cost of term insurance changes as we age, etc. are very helpful, especially when comparing term life insurance to whole life insurance.
On my phone so I can't link, but I wrote a hub on how and when you should consider permanent life insurance as part of your retirement plan, if you want it has some good points to consider. Feel free to send me a message if you have any speciffic que
Thanks Morgaren. I will definitely take a look at the hub.
Obviously, who have no understanding of the "buy term and invest the difference" approach. That whole life and other cash value policies are utter trash if you actually do the real math and comprehend what is in the policy wording.
Whole life insurance and other cash value policies are a total rip off, utter trash in other words. Your family is always better off buying a 20 yr level term policy, putting together a solid financial plan, that will make you debt free, and have you investing wisely. That way by the time that term policy expires, you would have enough assets to be self-insured and financially independent.
I have wrote a hub called Term Life vs. Whole Life and Other Trash Value Life Insurance for more information on the subject.
You make the assumption that every financial plan will work out for everyone. Life insurance isn't a savings vehicle, it is a preventative measure to ensure your savings vehicles can grow without interruption.
A good financial plan WILL work if followed. A 20yr level-term life policy is ALWAYS best, when coupled with a good financial plan that takes a family out of debt and helps them save and invest.
In most cases you comments are correct. Yet permanent poliies serve a definite role in more advanced estate and business succession planning cases of the high net worth. Mainlywhere the parties or business entity can outlive the limit of the term.
I have just posted an article that will address your question in depth. I would inviet you to take a few minutes to visit my hub; Life Insurance Answers from E. Shel Yetman and take a look at the story entitled...
Term or Not to Term… That is the Question
http://syetman.hubpages.com/hub/Life-In … hel-Yetman
When the insurance is offered by employer, the employer is responsible for paying the entire premium amount as long the employee is serving the organization. And if the life insurance cover is bought personally, then the premium amount shall be payable by you. The insurance policy is cancelled if the employee leave’s the organization. http://www.bharti-axalife.com/
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