If you are involved in financial planning or have gone through life insurance options previously, the question of choosing either term or whole life insurance would have surfaced.
Everyone has his or her preferred option. They would have great reasons on why they believe their choice is right. And they might very well be.
In that case, who is right and who is wrong? Or could everyone be right in their own ways?
The Purpose Of Life Insurance
Rather than to debate the pros and cons of term vs whole life insurance, we think the most important thing to consider first is why you are buying life insurance.
For most people, the need to buy life insurance is usually linked to key stages in life.
For example, a married couple who has children would see the need to have some life insurance coverage to provide for the financial needs of their children, should anything happen to them.
Why The Debate Then?
While both types of insurance are meant primarily for the same purpose (i.e. provide life insurance coverage), the details of how the insurance policies are structured are different, and hence, the differences in opinion.
The key difference is the coverage period. As the name suggests, term insurance covers the policyholder for a certain term period. For example, a 30-year old person could purchase a 25-year term policy to provide coverage till the age of 55.
In contrast, whole life policy would provide coverage for “life”. In most cases, this is up to the age of 99. At any point in time, there would be a death benefit payout provided by the insurance company if the policyholder passes on.
A reasonable expectation at this point is to assume that most people would pass on before the age of 99. In that case, most people would receive a death benefit payout if they buy a whole life insurance policy. We could even call it a “sure-win”.
Think about it; if it were a “sure-win” for us, the consumers, then it would be a “sure-lose” for them, the insurance company.
And all of us know that insurance companies are not in the charity business.
So is it really a win for us, the consumers?
You Pay More For Whole Life Insurance
Given the same amount of coverage, policyholders would need to pay more in terms of premium each year for whole life insurance.
That’s reasonable since whole life insurance is almost always a guaranteed payout. Insurance companies charge us more to ensure that there are sufficient premiums to invest and provide the death payout in the future.
Most whole life insurance policies would also include a saving element within the policy. If policyholders decide to surrender the policy, there would be a payout provided by the policy. It is this payout that attracts many people to purchase whole life insurance.
Read Also: How Whole Life Insurance Works
Surrender Value < Death Benefit Payout
It is important to note that the surrender value on your policy would be lower than the death benefit payout. In other words, you get less money when your surrender your policy, compared to passing on, with all things being equal.
In spite of how attractive it might seem for you to receive back all the premiums you have paid for your insurance policy, a whole life insurance policy generally works quite poorly if seen in the form of a saving plan, which agents sometimes try to sell it as.
Limitations Of Term Insurance
The limitation of term insurance lies in the coverage period that it provides. If you bought a term insurance policy till the age of 50 and then decide you need further coverage till the age of 65, you would find that the coverage is quite expensive.
Furthermore, it’s also with the assumption that you do not have any health conditions at that point in time that may disqualify you from buying an insurance policy.
That said, term life coverage for a young healthy individual would be affordable. At the age of 30, you could purchase a 30-year policy till the age of 60 at a reasonable cost, and consider saving and investing the rest of the money you saved. This is what people typically call, “buy term and invest the rest”
Never Look At Your Life Insurance Plan As A Stand Alone
Life insurance is important and worth spending money on. At the same time, we must recognise that holistic financial planning is much more than just choosing the right type of life insurance, or how much we are spending on life insurance policies.
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