Term VS Whole Life Insurance
Term VS Whole Life Insurance
1 .What are the main differences between term and whole life insurance?
All life insurance is term insurance. This is shocking to some who think there is a difference. But the other products – whole life, universal life, indexed universal life or variable life, are all based on the same mortality costs which are fundamental to term insurance. These products are called permanent life insurance. They have one thing in common. With term insurance, the policy owner must pay the mortality costs each year out of pocket. With Permanent products, the owner pays basically the same basic mortality costs as well, but then also funds an additional amount to prepay mortality costs for old age, when the mortality costs become unaffordable. The additional contributions are called cash value and accumulates over the years to fund the mortality costs in the later years. A distinguishing feature of the permanent products is how the cash values are invested.
2.Buy term and invest the difference” is a common phrase used to talk about why term insurance is a better strategy than permanent insurance. Is this good advice?
Buying term may be good advice, especially if the insured is young and has very little surplus funds to prefund the cost of insurance in old age. Since term and permanent insurance are the same product, it is difficult for an unbiased, competent advisor to say “Buy term and invest the difference” is the best advice. There are several factors which must be considered before that advice should be accepted. Some of the factors are: risk tolerance, alternative investment opportunities, age, need for insurance at the older ages, are just a few. Since permanent insurance was designed to make life insurance affordable at age 80 and beyond, buying term insurance could be a financial mistake. Why? The owner of the policy decides owning insurance at an older age makes sense, but the premiums are unaffordable is often the problem. What if the insured is uninsurable, the term lapses and there are no alternatives that can substitute for the loss of coverage.
3.What are appropriate situations where whole life or other permanent insurance is more appropriate than term?
Most often, the deciding factor is the importance of having a lump sum of cash come into the family at death. When death occurs at a young age, insurance provides income and financial stability for the family. When death occurs in the later years, the beneficiaries may have financial stability, but there are debts to pay, taxes to fund and ancillary needs that are best paid using the insurance proceeds.
4.From a behavioral finance perspective is there a case to be made for buying whole life insurance instead of “buy term and invest the difference”?
Permanent insurance is a substitute for bonds in a balanced portfolio. But permanent insurance really fits better in most cases because it is liquid and does not have a mark to market problem.. Permanent insurance provides double duty dollars. It has the immediate death benefit, but the cash values are also liquid and can meet liquidity needs for investment opportunities that become accessible.
5.Is there value in having a mix of both whole and term insurance? Are there rules of thumb for figuring out how much for each?
Life insurance is protection against a premature death. Therefore, it is important to accurately access the amount of insurance needed. Generally speaking, the cost of properly funding a permanent policy for the entire amount is unaffordable. As a aresult, having a mixture of permanent and term insurance is a wise choice. This is especially true now that the death benefit can be used to fund long term care needs. It is an ideal product for this financially devasating need.
