A common question asked by my clients is, “Which insurance is better, Term(temporary) or Whole (permanent)”? After I jokingly tell them the best insurance is the one that’s in-force (active and paid), I answer them honestly and say “it all depends on what your needs are”.
Before you can understand what your needs are, it makes sense to understand the two types of insurance. Let’s break down each one.
Term Insurance aka Temporary
Term insurance is also known as temporary insurance. It only lasts for a certain amount of time during one’s life. There are pros and cons to this type of insurance. Below are some of the options consumers consider when deciding on life insurance.
- Inexpensive – you can get hundreds of thousands of dollars, even millions and pay less than 70.00 (depends on age and health). It’s less expensive when you’re younger. True Story: I have a 47-year-old male client, who pays 58.00 a month for 500K in coverage
- Flexible – You can increase it at anytime
- Temporary insurance – this type of insurance expires after a specified period of time (e.g. 5, 15, 25 years etc…)
- No cash value – payments (premiums) made are not accumulating cash value, which means the money you put in is not adding up, it’s just gone
Who are term insurance policies good for? This policy is good if you own a home, have a child in school, going off to college or making sure everything is protected for a certain period of time.
Whole Life aka Permanent
Whole Life aka Permanent Life Insurance, lasts a person for their whole life, or until age 121! Here are some of the Pros and Cons of Whole Life insurance:
- Accumulates cash value – your premiums are building as you pay each month. The cash value accumulated from premiums paid can be used for whatever you’d like (e.g. down payment for a car, home, college funding, etc..)
- Tax Free – you can borrow the accumulated premium payments TAX FREE!!!!!
- You DO NOT have to pay back loans taken against the cash value (this will however decrease the benefit paid to the beneficiary) Ex. client has a policy out for 200K, they borrow 10K from the cash value and then suddenly pass away. Their beneficiary will only receive 190K. The outstanding loan amount will be deducted from the 200K.
- Living Benefits – since you can use the cash value while you’re alive, you can reap benefits before passing the benefits to your beneficiary
- Doesn’t expire – it covers you until age 121 (your whole life – doesn’t expire)
- Same payments – premiums stay the same for the life of the policy
- Expensive – Since this policy covers you for your whole life, it is expensive when you take out large amounts of coverage
- Slow to start – You don’t start earning cash value until year 3 and it starts off very slow before you see any real accumulation
Who are whole life insurance policies good for? Whole life insurance policies are good for individuals who want to accumulate cash value and save for something specific in the future. It’s also good for someone who wants to receive the tax free benefits and pass on generational wealth.
A few mindful notes:
- Be careful with only having job insurance. It’s not portable, meaning you cannot take it with you to another job for the same premium. If you’re terminated, laid off or quit, you must get your own insurance and pay much more for it. Most people can’t afford it so they let it lapse (go unpaid) It’s best to have your own from the beginning
- Two things insurance companies look at: age and health. The younger you are the least expensive your policy will be, whether it’s term or whole life. You never know if tomorrow you will be uninsurable. The earlier, the better
- If your family cannot live without your paycheck contributions to the household, then you need insurance
- Even if you’re single, having insurance when you’re young protects your insurability in case you one day become insurable
If you have any questions, please feel free to post your questions here or email me @ firstname.lastname@example.org
Next week’s topic: How do I know how much insurance coverage I need?
Changing the lives in our community….one person at a time