What is the benefit of getting a Term Life policy versus a Whole Life/Universal/Variable Life policy?
Term Life:
Term insurance has a pre-determined length of time that you will receive the benefit in case of death. Example: You are 30 years old and purchase a half-million 20-year level term policy. If you die at age 42 then your beneficiary would receive the face value of the policy. But if you died at age 51 then your beneficiary would get nothing because your policy expired.
Whole/Universal/Variable Life:
A Whole Life/Universal/Variable life policy does not expire and has a savings/investment built into it. In other words, some of the money you spend on a whole life policy goes towards a savings account in the insurance policy.
But studies have shown that the typical Whole Life grows about 2-4% annually while Universal and Variable grows anywhere between 5-7%. Studies have also shown that the first 3 years of premiums go towards paying the fees/expenses and do not start accumulating until year 4. Finally, if you die then your beneficiary gets the face amount of the policy and you forfeit the savings account.
Here is a real-life story:
A husband and wife have two children. We will call the husband Mr. D, he is the sole provider, and he makes $150,000 a year. He is 45, in good health, purchased two Whole Life policies in 2004, and now spends $13,000 annually for $1,000,000 in total coverage. The cash-value of these policies has grown to $48,000. Sounds great, doesn’t it?
Let’s pretend that Mr. D purchased 20-year level Term Life insurance instead. Note: These quotes are in today’s prices which may be a little cheaper than he could have bought in 2004. But I’m using his current age which is usually more expensive. He could purchase $1,000,000 in coverage for less than $1,550 a year – a difference of almost 88% or $11,450 a year! In 6 years he would have saved $68,700 in premiums alone (already more than accumulated in the Whole Life’s cash value).
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Mr. D could be covered until he reaches age 65, have a huge chunk of change in his retirement plan, and probably pay off the house. Have a plan to have affordable insurance while you pay off debts, get the children grown and out of the house, and save for retirement. You could become self-insured and leave a legacy to your children.
