Whole vs. Term Life


Whole life policies are very expensive compared to a term policy. This illustration shows the price difference between term and whole life policies.

$500,000 quote pulled 5/7/2021, for a 26 year old woman, non-smoker

If we take the example from above, the term life insurance policy will have cost $5,769.60 after 20 years. The whole life policy will have cost $70,629.60 in 20 years.

If you take the term life policy and invest the difference every year, earn even a conservative 4% a year in the stock market, you’d have accumulated over $100,000.

And sure, the whole life policy may have an accumulated cash value, however, you’ll receive dividends on a tiny portion of the premiums you pay; most of what you pay goes to the insurance company in fees. The structures of these products isn’t transparent and it’s hard to figure out what your cash value could be in future years. I can guarantee it wouldn’t be anywhere near as much as if you just invest the difference. And getting at the cash value… well that can be tricky as it would have to be a policy loan and if it’s not repaid can become taxable or reduce the death benefit.

Whole life policies are expensive because they’re “guaranteed” and complex. By comparison, term policies are simple and cheap.

The likelihood that you’ll meet an untimely death is unlikely. You’re very much likely to live to a ripe old age, so you’re better off with a term policy. Even if you did pass in this 20 year period, you’d have been better off with the term policy because you would have spent just over $5,700 but accumulated over $100k in the meantime and you’d receive the death benefit.

The point of this illustration is this; insurance shouldn’t be used as an investment. Whole life policies are incredibly expensive. Instead of paying high premiums to an insurance policy, get a term policy and invest the difference. You and your heirs will be glad you did.

3 responses to “Whole vs. Term Life”

  1. […] Whole life or universal life policies are marketed as a savvy way to pay for insurance and invest at the same time. If you’re looking to invest in your child’s future consider opening a 529 Plan or buying them savings bonds. In a 529 plan, after-tax dollars are invested, grow tax-free and used tax-free towards higher educational expenses or for private school. If you qualify, government savings bonds, like the Series I, are very secure financial products that can be used tax free towards higher education. Children do not need any kind of life insurance. […]

  2. […] A good rule of thumb is, the more complicated a product is the higher the chances the costs outweigh the benefits. Life insurance is where you want to keep it simple. In most situations, the promoted tax benefits from a universal or whole life policy will be more than eaten up by the amount in premiums you’ll pay for a whole or universal policy over a term policy. You are better off getting a term policy and investing the difference of what you would have been pa… […]

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