Whole life or term life: Which insurance is a better investment?

Life insurances are there to help the family financially get through the untimely death of the insured. The beneficiaries that the insured has named will receive enough money to assist them and prevent further financial losses.

There are currently eight kinds of insurance policies. We have whole life insurance, term life insurance, guaranteed universal life insurance, guaranteed issue life insurance, accidental death insurance, variable life insurance, simplified issue life insurance and equity indexed life insurance.

The most prominent—which people are divided over—are the first two types. However, which one of them would serve the insured and his or her benefits better? Let us look at some of their characteristics to determine which one is the better choice over the other.

Duration of policy

According to Investopedia, life insurance agents usually recommend whole life insurance—also known as permanent insurance—because of its duration as it can last up to the insured’s age of 100 years in order to keep the beneficiaries protected throughout the course of the insured’s life.

If we are going to look at the term life insurance, it usually lasts until the end of the insured’s term or period. Per NerdWallet, people can choose from the usual selection such as a 10-year, 20-year, or 30-year term.  

Cash value

Cash value, which is the money that an insured person can use when his or her insurance policy has been canceled, is non-existent in term life insurance, and because of this fact, term life insurance is specifically focused on the death benefit or the money given to the beneficiaries upon the passing of the insured.

On the other hand, whole life insurance has cash value, and the policy owner can also use the cash value of whole life insurance in other significant purposes such as paying the children’s tuition fees and buying a new house.

What makes it better is that the policyholder will not need to pay penalties or taxes. The Simple Dollar stated that this “tax-free status” will expire upon the death of the policy owner, rendering any outstanding balance after his or her death taxable.

However, once he or she uses that money for other things aside from retirement, the money reserved for the death benefit would obviously diminish, and their loved ones may receive a small amount of money once the inevitable finally happens. That is why we have saving accounts; it would prevent the situation of using funds reserved for other intentions.

There are different types of insurance that suit the needs and preferences of the policyholders. (Source)

Premiums

A policyholder pays premiums under the whole life insurance in order to keep the policy going, and the prices for these premiums are typically higher than term life insurance. Aside from the death of the policy owner, the coverage ends when the owner stops paying said premiums.

The premiums in term life insurance, meanwhile, are for its death benefit, and a person’s age, life expectancy, and health would be the basis for them. During the period of the policy, the premium and the death benefits are fixed.

Verdict

A person can consider his or her term life insurance as a good investment. How so? It can become as such when the insured pays a small amount of money for premiums—since they are usually less expensive than those of whole life insurance—to secure a bigger amount of death benefits.

Let us use the example of Investopedia to indicate this point. A healthy woman in her 30s has a term policy that lasts for 20 years, and in that policy, her death benefit is worth $1 million upon paying the yearly premium of $480.

If the woman dies at only 49 years of age, and she managed to pay her premiums 19 times, the recipients of the death benefit would collect $1 million without any taxes. Throughout the 19 years before her passing, she only paid $9,120, which makes term life insurance offering a remarkable return on investment.

If she instead chose whole life insurance, this woman would have paid $9,370 every year, and as the years go by, the amount of money she pays in premiums will keep increasing along with the guaranteed cash value.

In the end, the whole life insurance will be an efficient investment for those people with a staggeringly high net worth who want to reduce their estate taxes. An ordinary person might have a difficult time trying to afford such insurance, which would make term life insurance a better option for them.

(Featured image via DepositPhotos)