What is the benefit of getting a Term Life policy versus a Whole Life/Universal/Variable Life policy?
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.
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.
A husband and wife have two children. We will call the husband Mr. D. He is the sole provider for the family and he makes $150,000 a year.
Mr. D is 45, in good health, and purchased two Whole Life policies in 2004.
He 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?
Mr. D gets Term Life Insurance
Let’s pretend that Mr. D purchased 20-year level Term Life insurance instead. Note: These quotes are in 2010 prices. 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).
Mr. D has a plan
Mr. D could be covered until he reaches age 65, have a huge chunk of change in his retirement plan, and probably will have his house paid off.
This gives Mr. D affordable insurance while paying off debts (including the house) and while raising children. The money he hasn’t been spending on Whole Life can be used to pay off debt and save for retirement. Now that’s a moneyplan!
My Term Life Policy
I have found Term Life to be the least expensive option with the most amount of benefit. I was able to qualify for $500,000 of life insurance for only $385.00 a year. That’s less than $32 a month! This enables us to continue saving for retirement, cash-flow larger bills, and save for some really cool vacations. Oh, and we are saving for retirement too.
We used our local Dave Ramsey Investing ELP to get the best quote but I have found ZanderInsurance.com to be very easy to use as well. If you think paying for life insurance while getting out of debt is too expensive try them out. I think you will discover Whole Life is nice but Term Life is the better benefit.