Life insurance, in general, is not a subject many people want to talk about.
After all, its more about death than it is about life. But it is a necessary part of financial planning and a form of insurance many people should have! The two main forms of life insurance are Term Life Insurance and Whole Life Insurance.
Let’s take a look at term life insurance versus whole life insurance:
Term Life Insurance
Term life insurance provides death-benefit coverage for a limited period of time, the relevant term as specified in the term insurance policy (this could be 1, 5, 10, 20, or 30 years generally).
The death benefit is paid out by the life insurance company only when a claim is filed if the insured dies during the term of the policy. The contract would simply expire if no death occurs by the end of the term.
A term life insurance policy functions much like any other typical insurance (an event triggers payout).
Whole Life Insurance
Whole life insurance guarantees a benefit coverage for the life time of the insured (hence whole life) in the form of either an eventual death benefit or a so-called cash surrender value when the policy holder decides to cash out and effectively cancels the policy.
Term Life Insurance as a Pure Death/Risk Protection
Because a term life insurance policy only pays the claim upon the insured’s death within the stated term, a term life policy is for pure protection, as opposed to having certain savings elements in a whole life insurance policy.
Term life insurance is mostly used to provide coverage of the insured’s financial responsibilities for the family, such as mortgage payments, consumer debt, child raising, college education, etc., in the event of the bread earner’s death.
Term life insurance is also the most inexpensive way to obtain a substantial death coverage on a per premium dollar basis, as term insurance companies can easily collect enough premiums against few claims. It is the low likelihood of insurance companies having to pay a death benefit that makes term insurance premiums low and affordable (since term life expires, many policies expire before a claim is made).
Whole Life Insurance as a Savings Instrument
All life insurance was originally term insurance.
But because term life insurance does not pay out anything absent of a death claim and policy holders can pay premiums for 20 or 30 years and get nothing when the term expires, whole life insurance was later devised in response to the kind of upset from certain term insurance customers.
However, to guarantee a death benefit for every whole life insurance, premium payments have to be much higher than those on traditional term insurance to allow a cash reserve to build up against the known, rather than the uncertain, eventual death claims. In a sense, a whole life insurance policy is transformed into a life savings mechanism, as policy holders essentially make savings contributions themselves to pay for their eventual death benefit to their beneficiaries. And as such, their account does accumulate interest over time into a cash value. But the total premiums paid can be as high as 10 times comparing to a term life insurance.
Savings in the form of overpaid premiums can be returned in a later withdrawal, should the policy holder wish to cash out the insurance policy and forgo the eventual death benefit. The non-savings part of the premiums, roughly the amount as if it were for a term life, is retained by the insurance company on the ground that the company has effectively provided a risk protection up to the point of the cash surrendering.
Whole life insurance has over time lost its popularity mostly because it’s too expensive. In fact, many financial advisers suggest a separation of life insurance from savings–buy the inexpensive term life insurance and invest the saved premiums elsewhere. Still, a whole life insurance can have its place, such as guaranteeing insurance if you believe you my have trouble getting a term plan later on in life.
Life insurance isn’t a topic most people want to discuss. But it’s an important instrument that can help protect a family as well as possible provide an investment as well.
In order protect your family you need to understand the different kinds of life insurance. There are many out there that swear by one type of insurance or another. Do your own research and find life insurance that best fits you and your family.
Do you have life insurance? What kind of plan is it?
Are you looking for life insurance? Get a free quote from USAA now.
Budgeting on the Fun Stuff says
I get my life insurance through my job’s group rate. They provided me a $37,000 policy and I pay $1.11 a paycheck (every 2 weeks) for an additional $60,000. That $97,000 could pay off our house, the rest of my husband’s car, and cover my cremation.
I used to have a policy through my previous employer as well with an option to up the limits. We also had long-term disability.
Generally, the policies offered through employer are convenient. However, if you are in good health it is likely much less to get your own policy. Your own policy is portable – you can take it with you when you switch employers or become ill and/oir lose your job and really need it. check sites like http://www.lifeinsurance.org for example, to get quick compare quotes.
It can also be good to check local agent to see if you can get multi policy discounts. Some companies will offer 5% off auto and home for having life policy with them. The savings can come close to paying for the policy.
Roger @ The Chicago Financial Planner says
I agree with Tim’s comment regarding the portability issue. Employer offered policies can (but are not always) be cheaper. Should you switch jobs or move to self-employment having your own policy in place can provide protection from factors beyond your control such as the type/quality of the insurance provided by a new employer or future health issues that might prevent you from buying a policy at a later date.
Aaron @ Clarifinancial says
Whole life insurance doesn’t always last your whole life, even with timely payments. That’s one of the great myths surrounding life insurance.
However, I think it’s better to consider what your goal with insurance is before thinking about the type of tool to fix your problem.
As you allude to here in the comments, relying on life insurance through you employer may not be your best option, especially considering the employment market right now.
Life insurance through an employer is a nice bonus but it may not cover all of your financial needs.
Budgeting in the Fun Stuff says
.-= Budgeting in the Fun Stuff´s last blog ..Overlooked Costs of Home Ownership =-.
How do you mean?
I’m thinking of two ways that you can get life insurance through an employer: where they offer it to you automatically and where you can use the company’s group rate. In the first, its more of a bonus and may satisfy your needs. In the second, you are purchasing the policy but you are getting a better rate because of the company. Here you will probably have more options to cater the policy to your specific financial needs.
Aaron @ Clarifinancial says
If you can buy your own policy outright and they offer they types of options you need, you should compare what your employer has vs. what you can get on the open market. Then (the most important step), take action.
There are two common things to watch out for with employer policies:
1. Many life insurance policies offered through employers are yearly renewable term (YRT) policies or an older form of universal life (UL). The premiums may not be stable. After a certain point, the premiums may be unsustainable. This works to keep prices down for a short duration of employment.
2. Taking the policy with you (portability) may be too expensive. If your employer subsidized the premiums or you have to “convert” the policy to keep it beyond your employment, taking the policy with you may be more expensive than you thought.
If you’re offered some crazy-good deal on life insurance through your employer, by all means take it. But in many cases, you should treat it as gravy on top of the proper amount of coverage you already have for your family.
I’ll write about this for tomorrow. Thanks, Craig.
Roger @ The Chicago Financial Planner says
Aaaron I agree with your comments completely.
Mike - Saving Money Today says
I’ve got a pretty sizable policy through my employer’s group rate too. It costs a fraction of price I’d pay if I bought it on my own.
.-= Mike – Saving Money Today´s last blog ..The Movie Lover’s Guide to Saving Money =-.
Always check with your HR to see if they have group rate offers. We got a great deal on auto insurance through my previous employer.
Guy G. says
My wife and I have $300,000 each on a 35 year term. We were about 25 when we got it and it only costs us $50 a month. Will never increase, and will take care of all our responsibilities until we have children. At that time, we’ll add maybe $250,000 each on a 25 year term and another $250,000 on a 15year term.
You also have to factor in that that is only times our current income.
.-= Guy G.´s last blog ..Investing Basics – Tips on Budgeting =-.
Jane@Australian Life Insurance Search says
In Australia you can have Term Life Insurance until age 99 and when you think you don’t need term life insurance anymore you just stop paying premiums…
No need for whole life insurance at all :))
Found another interesting article http://finance.yahoo.com/news/4-life-insurance-policies-never-180314056.html:
“4. Whole life/universal life. Life insurance is a tool, not an investment. With whole life/universal life insurance, you will pay a higher premium with the promise that the company will take those extra dollars and invest them for you. The problem is that this type of insurance is very expensive. The investments don’t grow because the expenses eat up your interest.”
Jenna, Adaptu Community Manager says
Oh man! I have no idea. Just signed up for life insurance during open enrollment. Now I need to research more.
P.s. Great seeing you yesterday at the meet up!
Robin Uram @ Quizzle says
Awesome article! So many times people confuse the two. Even worse find neither of them important. It is so inexpensive if they do the research!
Cherleen @ My Personal Finance Journey says
We do not know what is waiting for us on the other end of the line so we must always be prepared. We used to have life insurance from our employers, but now that we have gone freelance and running our small business, we have been looking for a good provider and deciding whether to get whole life or term life. Your post will definitely help us in our decision-making. Thank you for the information.
Rob Field says
Whole of life ..Verses Term . , I Have been in this industry for 20 years , and I over time .. I see the same old comments .
At 34 I, become a broker. was young and gung ho.. all for TERM Insurance .. .. by the way .. ( It seems just like 5 years ago )
( TERM .. is also called .TEMPORARY.. Insurance.. for a reason .. I Dose run out , or Just get too expensive .
Some one once said to me .. “It,s a bit like wetting the bed, some time soon your going to have to get out of there. ”
But see our business Is about Providing Security for the everyday , Life problems , that WILL ..come about , the urgent needs for Money , up,s and downs in life .
Sure ..Banks handle the first 5 years ..every day management and monthly cash flow …
But CREDIT cards, and , Borrowing is , just digging future holes .
For beyound 5 Years .. Whole of life . Paid to 65 .. … is also called PERMANENT insurance . ..
If you have a requirement for a permanent solution .
Such as … 1 Always NEED a liquid asset .. of CASH .. say 5 years and onwards … Yes you will .
2 Need to have a security .. that is always recognized by every Leander ..,
if you have a substantial.. whole of life Police . .. Its an instant liquid security , anywhere
3 Like to be worth. something , . Have an estate, of Guaranteed Dollars …
“before you can have the time, to build it “.
ie. .. How wealthy , would you like to be …, now ..
,” I have a bundle of Dollars that I am selling at 5% , How many would you like to BUY . .. $500,000 .
Its more Liquid than real estate..and always has a Know value .. by Contract Law .
I only have one regret, in my Carree , now at 72.. as a retired , Financial planner , Medium, to long term insurance broker .
that I did NOT head my Managers advice when I first . joined his team , to :.. Have a SOLID Whole of life .. PLAN .
Pay yourself FIRST >.. 15%
Always put aside a MIN of 10.. 15%… of all the money that flows through your hands as Income ,
into a Whole of life .. Paid to 65 ,.. reviewing it ,at every 2 years
You get a pay rise.. a bonus .. Plow 15% it back into your whole of life …
Its grows to become , YOUR substantial Cash RESERVE .
This then uses compound Interest, to work for you ..
and is your reserve funds and retirement security .. regardless of what is happening in the financial world around you .
Don,t be temped by the , bubbles of High interest rates every now and then ..
they are short term mirages .. that will NOT.., and averaged out over time , cannot last .
You might gain
Boy how true this has all been ./ the world has financially ,stuffed up big time, because it has got away from the basics.
What is .. The reason that People have an Investment ., Be it Diamonds , Gold Property or anything else .
They really want something ….That will , Pay them the most ,Money, when they need it the most
and if you take your life time possible needs ,, the large , Whole of life fits the bill nicely ..
Jeffrey Skatoff says
I have found that for the same amount of premiums, you can get five times to 20 times as much term insurance as whole life insurance. What I see is families that have very expensive whole life policies with not enough death benefit – it does not get the job done. Having whole life is great in being able to borrow against it, accumulate some wealth, but if you actually die, you may not have enough death benefit for your family. And that is the purpose of the life insurance – NOT to save. There are better ways to save. Of course, if you are very wealthy, then whole life could be a good way to go.