You might have heard the arguments in favor of term life insurance over other types of life insurance, such as whole life. But it’s never a bad idea to review the reasons why term is the way to go, that way you aren’t ever tempted to buy another type of coverage by a persuasive sales pitch.
For most people – in most situations – term life insurance will be the best kind of coverage to have.
So as a refresher, here are the term life advantages – and it isn’t just money either.
Have More Money to Invest
The time honored saying is buy term and invest the difference. This is the most common reason cited for choosing term life insurance over other types of insurance that can also provide an investment provision. Since term life insurance is so much less expensive than investment hybrid policies, you can literally accumulate a fortune by purchasing a term life insurance policy, and investing the difference in something as simple as an index fund that is tied to the S&P 500.
As an example, let’s say that you want to buy a life insurance policy with a $500,000 death benefit. You can buy this kind of coverage with a term life insurance policy for a premium of $1,000 per year. You can also get the same coverage through a whole life insurance policy at a premium of $10,000 per year, but it will also include a cash value accumulation and investment provision with dividends and all kinds of other goodies.
The numbers presented for the whole life policy are very encouraging – after 20 years you’ll have a cash value of $250,000, and that’s pretty impressive.
Or not.
On closer analysis, you run your own numbers to see what it is you might be able to do with the $9,000 in extra cash that you’re paying for the whole life policy over the cost of the term life policy. A bit of research shows that investing in the stock market has provided an average annual return of about 10% since 1926.
By using a simple savings calculator you discover that investing $9,000 per year in an S&P 500 index fund at roughly 10% per year will provide you with about $570,000 in 20 years.
Suddenly that whole life insurance investment provision doesn’t look so impressive. In fact, it will cost you over $300,000 in lost investment returns over the next two decades.
Buy Larger Amounts of Insurance
We just covered the benefits of purchasing the same amount of coverage with a term life insurance policy at a greatly reduced rate, and how you can invest on your own to achieve better return than you can with an investment type of life insurance policy. Now we’re going to talk about other options for the savings on the premium.
You might decide that you want more life insurance coverage than $500,000. With the amount of money that you will save on the term policy versus the whole life policy, you can purchase a term policy with a $1 million death benefit with a premium of about $2,000 per year. That’s twice as much coverage as you will get from the whole life policy, but it will still be cheaper by $8,000 per year.
And once again if you were to invest the additional savings, you’d still have a whole lot more than you would from the investment provisions in the whole life policy, but you’d also have twice as much life insurance protection.
Match Coverage With Specific Needs
Because it costs so much less than whole life insurance, it’s easier and less expensive to purchase term life insurance to address specific needs. For example, you can use a term policy specifically to payoff your mortgage, or to buy out a business partner’s interest in your company.
Since both activities are essentially temporary in nature, there will be no need for a high cost permanent life insurance policy, such as whole life. Term life insurance will save you money and offer you more options based on the specific needs that you have.
Adjust Coverage As It’s Needed
The need for life insurance actually rises and falls during your lifetime. For example, generally speaking, your greatest need for protection, will be when you have young children. This is not only because you will need to make sure that there’s adequate cash available to support them through adulthood, but also because you want to provide for their education, as well as to give them some capital to get good start in life.
But depending upon the ages of your children, that need will exist for 20, 25, or maybe 30 years tops, and it will disappear. Once your children reach adulthood, you will no longer need a very large amount of life insurance, since they will already be adults and can care for themselves.
Term life insurance works perfectly in this situation, and you can buy a policy with a term of up to 20 or 30 years, and then let it lapse when you no longer need it. Or you can simply replace it with a less expensive policy with a much lower death benefit.
Keep It Only As Long as You Need It
We just described how the need for life insurance will decline at certain points in life. But it is also possible that you will reach a point where you no longer need life insurance at all. This can happen if you accumulate a substantial amount of wealth. That will give your loved ones cash needed to cover your final expenses, and to enable them to readjust to life without you.
With term life insurance, you can do just that – keep it only as long as you need to. Whole life insurance, on the other hand, is often referred to as permanent insurance, which means that you will have it virtually all of your life. But if you don’t really have a need for life insurance at some point your life, then paying for it will simply be a waste of money.
So there you have it. If you’re approached by an agent or company that is trying to sell you on the virtues of whole life insurance, just politely answer “no”. Then call for a term life insurance policy that will cover all of your needs at a fraction of the price.
