Whole Life vs Term-The Insurance Showdown

There are two types of life insurance policies that are popular today, term life insurance and whole life insurance. Whole life insurance policy provides coverage not only on the term of the policy which is the entire length of your life as well as the interests that has accumulated on top of it whereas term insurance basically gives coverage on a fixed length of time, usually 20 to 30 years.

Now, in terms of life policies, there are two types of premiums, level term and annual renewable. The level term remains for the whole term of the policy and it can be bought in increments for up to thirty years while the latter increase its level of coverage as the policy holder ages. On the other hand, whole life insurance has two factors, the mortality charge and the reserve. The mortality charge is the sum paid for the insurance while the reserve denotes the investment aspects that earns interests.

So which is the best insurance plan? Although one person’s situation differs from the other, it is widely believed that most people prefer term policy over whole life insurance for a host of reasons.

Costs- In general, whole life insurance policies are much more expensive than term policies. Although the investment aspect of whole life insurance is an attractive feature, it hardly makes up for the hefty premiums, which can go up to millions of dollars per policy, which you need to pay for as long as you live.

Investment: Aside for the coverage, another main feature of whole life insurance is the investment portion. It may sound like you will be saving a lot of money for long-term in its investment portion but that’s not really the case. It’s more like a case of forced savings.

Be aware that the return rate for most policies are small, ranging only from 2% to 3%. These figures will not keep up with the inflation. It’s best to explore other means to invest your hard-earned money.

Hidden Costs- Whole life insurance policies come with higher fees and commissions, with their typical commissions going as high as 100% on the first year’s premium. This is the main reason why commission-based financial planners push these types of policies on people who clearly don’t need it. They earn a massive amount of money on commission at the expense of the consumers which is never a good thing. These hidden costs are the reason why it is best to go for term life policies

Needs- Note that with whole life insurance policies, you own the insurance for the rest of your life. The truth is that you may not need insurance later in your life. What income are you protecting your family to live on if you are 80 years old and retired? Case to point: A 20-year old who purchases a 30-year level term policy will expect that his insurance coverage will expire right after his children have, in theory, grown and gone off to live on their own. That is the perfect time that you do not need coverage.

Of course, whole life insurance is not always bad; it’s just not for everyone. If you are immensely wealthy and want to utilize whole life in your estate planning, this type of policy may prove to be beneficial for you. This goes the same for people who prefer to wait for a long time to be returned your premiums to you.

But in terms of the purest form of coverage, term policies are almost always the better options for a lot of people, mainly because term policies’ significantly low premiums allow most people to get enough coverage to protect them against loss of income.

Tags: life insurance, life insurance policy

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