Why I would never choose whole life insurance over term life

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A few weeks ago, I was talking to a friend about her finances when she told me she had a life insurance policy. I was stumped. My friend is single, doesn’t have kids, and doesn’t own a home. If she died, no one would be impacted financially.

It turns out my friend’s parents had bought her a whole life policy when she was born, and she recently took over the payments. She was paying hundreds of dollars a year for a policy she didn’t need.

Life insurance is a complicated topic, and many people avoid buying a policy or don’t think they need one. On the other hand, it’s easy for people like my friend to buy an expensive policy without realizing what whole life insurance really means.

What is the difference between term life and whole life insurance?

There are several kinds of life insurance policies, but the two most common are term life and whole life.

Term life policies only last for a specific period of time and are generally sold in 10-, 20-, and 30-year increments. When the term expires, you can apply for new coverage. If you don’t need life insurance at that point, then you don’t have to buy it.

According to Quotacy, a $500,000, 30-year policy for a 30-year-old man will cost, on average, $33.58 a month. Term life coverage is much less expensive than whole life because the policies have a shorter duration. 

Another reason why term life is cheaper is because most people who buy term life do so for a period of their life when they’re less likely to die. This makes the payout likelihood smaller, so insurance companies can charge less. 

Many term life insurance policies require a medical exam. This, plus your medical history, will determine your overall health rating and monthly premium. There are a few online insurance companies that don’t require a medical exam if you don’t have any chronic diseases or your history doesn’t indicate any potential problems.

Like it sounds, whole life provides coverage for your entire life. It’s the most popular kind of permanent life insurance. 

The process for buying a whole life policy is simple. You choose a company, determine the total payout, and start paying the premium. The policy will remain active as long as you keep making payments. According to Quotacy, a $500,000 whole life policy for a 30-year-old man costs, on average, $510.66 a month. That’s about 15 times more than the cost of a term life policy.

When you die, your beneficiaries will receive the whole life amount. Some people use whole life insurance as an estate-planning tool and to leave a legacy for their heirs.

“The first question most people need to answer is, ‘If I die unexpectedly before accumulating enough assets, would the loss of my income create financial hardship (e.g. reduction in standard of living, unable to pay for college, delayed retirement) for my spouse/family?'” said Brent Perry, CFP and founder of Piedmont Financial. “If the answer is yes, then life insurance can cover the gap.”

Why I picked term life insurance

Consumers who choose whole life mostly do so because they want to leave something behind for their loved ones. But the math shows that it’s better to pick a term life policy instead of whole life and invest the rest.

I currently have a $500,000, 30-year term life policy for myself. It costs $45 a month, mostly because of a genetic predisposition I have. A $500,000 whole life policy would cost about $447.54 a month. That’s about 10 times more each month, or $4,830.48‬ extra per year.

If I invested that difference in a retirement account that grew 7% per year, I’d have $494,401.41 in 30 years, not far off from the $500,000 whole life insurance payout. With term life insurance, I can afford to both have life insurance coverage and save for retirement.

Experts agree that, despite the fact the whole life insurance policies do include a cash value that can be used during the policyholder’s lifetime, they’re not an ideal investment vehicle — the interest the cash value earns is no match for the wealth-building potential of a retirement account.

The risk of a whole life policy lapsing is also high. Some reports say that 80% of people let their policies lapse, likely due to cost. It’s much easier to pay $30 a month instead of $300. You’re usually allowed one missed payment before the coverage is canceled. If you miss a month of contributing to a retirement fund, you won’t be penalized. 

If you still think whole life insurance sounds better, I recommend talking to a financial planner to see what they advise.

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