Jun 2010
5
First, let’s take a look at the whole life, versus it’s cousin term life insurance. When you purchase whole life insurance, you are buying permanent insurance that will remain in effect until you meet your end. Term life insurance is only in effect as long as you make payments. Rates for term life insurance skyrocket past a certain age where the likelihood of your passing increases.
“Permanent” Life Insurance?
Agents love to describe whole life as “permanent insurance.” The problem is that it’s not really “permanent” insurance. It’s not like you can pay the premium and forget about it. It’s only permanent as long as you keep paying premiums.
While you may not need to send in any money to keep the policy in effect after 15 or 20 years, you are still being charged a premium and the returns on investment from the money you sent over the years pays the premium. If returns fall below the amount needed to pay the policy, you have to start sending money again. Whole life policies make about 2-3% returns per year, more than a savings account, but barely enough to keep up with inflation. If the value of the policy remains fixed, then the true worth of the policy goes down every year, as long as you let the dividends pay the premium.
So really, whole life is just a convenience insurance policy. You don’t have to worry about investing your money or chasing after a monthly bill as long as the dividends continue to pay the premium for you.
Whole insurance can be a better choice in theory. On paper, whole life provides many great benefits that exceed what term life insurance can offer. The cash valued accrued on whole life gives families a value to borrow against should the need arise. And if held for 20 years or more, most policies will return a decent investment. In addition, whole life guarantees your premium remains the same as you age.
The problem is that few people are able to maintain one policy over their lifetimes. Once you are locked into a whole life policy, regret can set it when money gets tight. If you don’t have enough money to pay the premium, you lose the benefits you were paying the extra premium to earn. If you can keep paying the premiums over your lifetime, whole life can be a very smart choice.
Term Life
The less expensive term insurance is straightforward. As long as you pay the premium, you have a certain amount of insurance coverage. Because whole life insurance can cost five times more or greater than term, many recommend buying term insurance and investing the balance in the stock market. This could be a wise choice, given that your term rates will skyrocket after age 50, especially if you come down with any serious health conditions like diabetes or heart problems.
The shrewd life insurance customer will not only invest the savings over whole life insurance, he or she will also shop a new term life insurance policy one year before the current term ends in order to lock in a better rate before an age-based rate hike. Some people do this every five years.
With term insurance, you can choose how much insurance you can afford when times get tight. You can purchase another policy with a smaller payout until your economic situation improves. But at some point, you age to the point where you become uninsurable through term life insurance. When that happens, whole life is really your only option.
Strategic Life Insurance Buying
The most sensible approach to life insurance is to purchase term coverage while you are young. As you approach age 50, you take a look at whole life insurance rates. If they are about the same as term or only a little more expensive, you may decide that whole life makes more sense. Buying a whole life policy at 50 will guarantee that you pay the same insurance premium as you age. Many more people are living beyond age 70. By that point, the whole life insurance will have proved to be a decent investment.
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