is term life insurance different from
whole and which is the right selection
for you? That's a key question to
answer right away before going any
further. Let's compare the two in
layman's terms and see why term offers
many advantages over whole life...the
primary one being considerable lower
get what you pay for" doesn't really
apply when comparing term life and whole
life. Or maybe it does.
Whole life is a very different animal in
that the carrier will definitely pay out
some amount of money as long as you keep
the policy in effect. There's
usually a smaller amount of life
insurance benefit from the start and
then you start to build "cash value" as
an add-on to the base term life benefit.
Whole life is very expensive when
compared to term life insurance so the
amounts a person is able to afford is
typically much less. Unless you
are willing to pay quite a large amount
in premium, purchasing enough protection
can be an issue for most people.
As we addressed in our article on how
much life insurance coverage to
purchase, the financial responsibilities
and income replacement needed for most
families would be hard to address with a
whole life policy unless you are willing
to pay a significant amount in premium.
reason for this cost is that whole
insurance doesn't really fit the model
of insurance. Insurance, by
definition, is a device to spread the
improbable risk that might wipe one
individual and spread among a larger
number of people. When done
correctly, each person pays a premium to
offset the total risk for the group.
Whole life is not this. With whole
life, every member of the risk group
will trigger their benefits, albeit at
different times. The carrier
basically needs to invest the premium
amount and make enough money for a long
enough average period to pay out the
benefit to everyone and make a profit.
This structure is probably more akin to
a mutual fund with some added life
benefit up front in case. It's
hard to make an argument for this.
A better approach is to buy a much
larger term life benefit at a fraction
of whole life cost and invest the
difference if you like. That's
essentially what the whole life carrier
is doing but with an added margin at
your expense. It's hard to see how
whole life benefits anyone besides the
brokers and carrier when you analyze the
dollars over the long term.
life insurance is true insurance.
At it's core, you are protecting against
the risk of death for a fixed period of
time and for a fixed amount. We
address the concerns to look at when
term length period of time
but the key is to address the years that
financial responsibility falls hardest
and "replace lost income" during that
period and/or address financial/debt
liabilities such as mortgages, loans,
credit cards, etc. This method is
significantly less expensive than that
of whole life insurance.