If you tend to think long-term when it comes to managing your finances, you’ve probably seriously considered (or are considering) purchasing a whole life insurance policy. After all, whole life is permanent life insurance, so you’ll be able to keep it for your entire life. But you may be able to achieve all of your financial objectives using a 30 year term life insurance policy, and spend a whole lot less money in the process.
Let’s consider some rough numbers. You would like to purchase $250,000 in life insurance coverage. You can purchase a term policy for $2,000 per year. But you can also purchase a whole life policy for $10,000 per year. The whole life policy has the advantage that not only is it permanent, but it also has an investment provision. According to the life insurance agent’s chart, after 30 years the cash value of the whole life policy will be well into six figures, and will also serve as an additional retirement plan.
However, despite the advantages of a whole life policy, a 30 year term life policy will still save you $8,000 per year – and that’s being conservative. You can do a lot with that extra money, and more than enough to offset any advantage that the whole life policy has.
But in the meantime…
You Can Have Life Insurance Protection – And You Can Invest Money
With a 30 year term life insurance policy, it is highly likely that you will have coverage during the most important years of your life. And at the end of the 30-year term, there will likely be options to renew your policy in some form.
For example, you may be able to choose a new term policy at the end of the original term, that will both lower the death benefit and shorten the term. The combination will enable you to continue coverage at a more affordable rate, and maybe even for the rest of your life using a series of policies.
It’s also important to remember that you can do a lot in the three decades that are covered by a 30 year term policy. And after the term expires, it’s likely that your need for life insurance will not be as great as it is right now. After all, the actual need for life insurance is not fixed – it actually varies based on your age and circumstances.
You Can Raise a Family in 30 Years
For most people, 30 years will cover the time it will take to raise a family. After all, the time when you need life insurance most is when you have dependents. And no one is more dependent than very young children.
But kids grow up. And after a while, they are no longer dependent on you financially. When that time comes, you may no longer need a life insurance policy that is anywhere near as large as the one that you have now. Continuing to pay for a high level of coverage that is no longer necessary is a complete waste of money.
Your Mortgage Will Probably be Paid in 30 Years
Not coincidentally, it’s likely that your mortgage will be paid off in 30 years, since that is also the standard term of the typical mortgage. And once your mortgage is gone and paid for, your single largest debt obligation will no longer exist. This is one of the primary reasons why your need for life insurance is likely to decline as you get older.
It’s also typical that people go through a high debt phase in life. That usually happens when you’re in your 20s and 30s, and need to borrow money to pay for everything from clothing for your children to a new car. But as you get older, and those items are no longer necessary, debt becomes less of a factor. And as debt declines, so does your need for life insurance.
It does little good for you to maintain permanent life insurance to cover a time when debt no longer exists. This is one of the big reasons why term life insurance is a better value than whole life – you can match coverage with actual financial need. And when the need no longer exists, you can end the insurance coverage.
You’ll Have a Lot More Control Over Your Money for 30 Years
So far we’ve discussed the long-term need for life insurance coverage, and how a long-term term policy can accomplish exactly what a whole life policy will. But there is yet another advantage to term life insurance, and it’s a big one: control of your money.
At the beginning, we discussed an example of how a term policy could save you $8,000 per year compared to a whole life policy with a comparable death benefit. If you save that money each year, and invest it even modestly, you will have control over the money for the entire term of the policy. At $8,000 per year, we’re talking about $240,000 over 30 years.
Yes, a whole life insurance policy builds up cash value through the investment provision. But any money that you accumulate in the policy can only be accessed either by borrowing it out, or by terminating the policy. And no matter what a salesman tells you, the investment returns on whole life policies are mediocre at best. After the insurance company deducts their annual commissions and fees, your return on investment will be below average. You will do well to have a cash value of $250,000 after 30 years on a whole life policy with a $250,000 death benefit.
By contrast, if you invest the $8,000 per year that you save as a result of a term life policy, and invest it at, say 7% per year, blended between mutual funds invested in growth stocks and fixed income securities, your account will grow to more than $784,000 after 30 years.
Now, it will take some discipline and commitment, but that’s real retirement money! And you’ll have had direct control over it for 30 years.
And After 30 Years You’ll Probably be Self-Insured
This is an important point that people miss in the whole life vs. term life debate. After a certain number of years, you’ll be largely self-insured. That will certainly be the case if you invest the money that you save on a term life policy, as calculated above. But as we also noted, many of your most pressing financial concerns – like raising your children and paying your mortgage – will disappear after about 30 years.
If you have a sufficient amount of money saved and invested, your need for life insurance will not be as great. With a term life insurance policy you can always lower the amount of coverage that you have, and that will probably fit perfectly with your long-term financial strategy.
If you’re contemplating taking a whole life policy, or any type of investment type life insurance plan, be sure that you first consider the benefits of a long-term term policy first. You may be surprised to see how much better off it leaves you in the end.
