You might be aware that term life insurance is more popular than whole life – in fact, it is much more popular. There are tangible reasons why this true, five of them actually. When you read them you will probably agree that term life insurance is the best type of policy for your life insurance needs.
1. Lower Premiums
Let’s lead off with this point since it is so obvious. And it’s important because most people consider life insurance to be a necessary evil, not something they actually desire in and of itself. After all, you’ll never be able to collect a life insurance benefit on yourself! Whenever people are looking to control their budget, they typically look for savings first in the necessary expenses. That includes food, utilities, transportation – all necessary elements of modern life. Life insurance falls into that category as well.
That being the case, people want to spend as little as possible on life insurance, and term life insurance enables them to do just that. In that regard, term life insurance is about saving a lot more than just a few dollars. A term life insurance policy will generally cost no more than 10% or 15% of what you will pay for a whole life insurance policy with the same death benefit. Why would you spend $2,000 per year to maintain a $200,000 whole life insurance policy when you can get the same death in a term life policy for around $250?
For young families just starting out in life, beset with expenses and looking to save some money, term life insurance is the perfect vehicle to fill their life insurance needs.
2. You Can Buy a Lot More of It
This goes hand-in-hand with the fact that the premiums are much lower on term life insurance that whole life insurance, but it does so to such a degree that is actually a benefit on its own. Since term life insurance is so much cheaper, you can buy a larger policy, and still save a lot of money on the premium.
In the previous section we look at the example of purchasing a $200,000 life insurance policy, either as a whole life policy at $2,000 per year, or as a term life policy at $250 per year. But let’s say that you really need $400,000 in coverage – you will be able to get that amount of coverage through a term policy for about $500 per year.
That means that you will get twice as much life insurance coverage on the term policy as you will for the whole life policy, while still paying 75% less for the annual premium. For people who have high life insurance needs, term life insurance almost always fit the bill in a more cost-effective way than whole life insurance can.
3. Life Insurance Needs Fluctuate
Whole life insurance is often referred to as “permanent life insurance”. This is because you can quite literally keep the policy for the rest of your life. The death benefit will never down, and the premium will never go up.
But as good as that sounds, it also creates certain limits. For example, there may be times in your life when you will need more life insurance coverage than at others. For example, if you’re in your 20s or early 30s and starting a family, you’ll probably have a need for very high level of coverage, since life insurance will have to provide for your dependent family after your death. But if you are an empty-nester in your 50s, you probably won’t need nearly as much coverage as you did 20 or 30 years earlier.
Because it is temporary in nature, term life insurance tends to flow better with life. You can buy more of it when you’re younger, and have a greater need, then cut back on the coverage as you get older and you no longer have dependents.
4. Term Life Insurance Can Be Tied to Very Specific Needs
This is another example of the flexibility provided by term life insurance. Term can be used to cover specific parts of your financial life. For example, you can take a term policy that will be used primarily to pay off your mortgage. You might also take a policy that will be specifically tied to buying out your interest in a business upon your death. In that way, cash will be available to your business partners, will use the funds to pay your family for your interest in the business.
In theory at least, you can use a whole life policy in the same way. But the cost of whole life insurance, plus the fact that it is permanent, makes it very unsuitable for covering specific and temporary liabilities.
5. People Are More Sophisticated About Investing
Historically, one of the biggest selling points of whole life insurance has been the investment provision. You can buy a life insurance policy, and it will also function as an investment plan that will help you to build a financial future.
There was a time when that sales pitch worked. But people are a lot more sophisticated about investments these days. And most are aware that they can get better returns by investing their money in an index fund based on the S&P 500 index, than anything they could get in a whole life insurance policy.
This is the whole idea behind the claim of “buy term and invest the difference”. A generation or two ago, a consumer might have been skeptical about his or her ability to invest the difference. But today most people know where they can get the best returns and that won’t be a whole life insurance policy. Since a term life insurance policy is so much less expensive than a whole life policy, investing the savings in a simple index fund will leave the policyholder in a better financial position that if he or she purchased a whole life insurance policy.
That’s the long and short of why people prefer to take term life insurance policies over whole life policies. You should be one of them!