We all need to have good life insurance cover, but should you go for term life insurance or whole life insurance? Here’s how to choose.
The Importance of Life Insurance
There’s no doubt that life insurance is a product we all need, especially if you have children. In the event that some disaster strikes, we all want to know that our loved ones will be taken care of financially.
Of course, we all hope that we will live to a ripe old age, and get not only to see our children grow up, but also our grandchildren…and maybe even our great-grandchildren, too. Unfortunately, not all of us are so lucky. Every day, people like you and me get struck down in their prime. Some die in accidents, some contract fatal diseases, and other suffer fates that we don’t even like to think about.
So we need to plan for the worst, even as we hope for the best. We need to have adequate life insurance so that whatever unexpected shocks lie ahead, our families will be financially secure and able to rebuild their lives.
Life insurance is a strange product for sure. We spend thousands of dollars on it, yet we hope that we will never need to use it. And if the time ever comes when it does get used, we won’t be the ones who benefit! Strange indeed, but still very important. And for our family’s sake, it is vital that we make the right choices when choosing a policy.
Term Life Versus Whole Life Insurance
There are many different life insurance products out there, but they fall into two main categories:
- Term life insurance
- Whole life insurance
So what’s the difference? Before we start to consider which one you should choose, let’s be sure that we understand what each product offers.
Term Life Insurance
This is the simplest product, and by far the cheapest. You buy life insurance for a set period, typically 20 to 30 years. You pay a small premium each month, and in return for cover on your life. If you die any time during the term of the policy, then (assuming your premiums are paid up to date), the life insurance company will pay a lump sum death benefit to your family. Here are the benefits of term life insurance:
- Very low cost premiums
- Simple to understand
- An affordable way to protect your family
- Covers the years you need it most
Whole Life Insurance
When you take out whole life insurance, you are getting into something more complex and much more complex. The idea is that you pay much higher premiums each month, with most of that money being invested to create cash value in addition to a death benefit. The benefits are:
- Bigger payouts to yoru beneficiaries
- The ability to build up a high cash value
- Access to cash funds in emergencies
Which Way Should You Go?
For many decades, most people chose whole life insurance for a very simple reason – that is what their financial advisor told them to. Unfortunately, financial advisors don’t always give advice that is best for the customer. Sometimes, they make decisions on what is best for their own business.
The math is simple. Because whole life premiums are ten to twenty times higher than term life premiums, selling a whole life policy generates much more in commissions for an insurance agent.
Because most people had limited access to financial information, they had no way of telling whether they were getting good advice or not. In the Internet era, all that has changed. Now we have many financial experts telling us in plain and simple English that whole life insurance is usually a very bad deal.
Suze Orman is one well-known financial expert who has little but contempt for whole life insurance policies, as this video shows:
She is not the only expert who feels this way. Dave Ramsay also has very strong feelings about the cost of whole life insurance policies:
The Problem with Whole Life Insurance
The difficult with whole life policies is that they are trying to be two different things at the same time – an insurance product, and also an investment product. As a result, they end up being not especially good at either.
Whole life insurance is expensive by any standards, taking a huge chunk out of your income each month for something that you are hoping never to use. To make things worse, insurance companies don’t have much of a track record when it comes to investments. In most cases, you would be much better off investing your money somewhere else.
To make things even worse, your first two years’ worth of premiums probably go straight to the insurance agent as commission. So you are paying a small fortune each month, just to line your insurance agent’s pockets.
Term Life Insurance Wins the Day
So for the vast majority of people – especially for families with growing children – term life insurance offers by far the best deal. It’s much cheaper, and provides all the cover you need to protect your family.
When you have a growing family, cash flow is a major issue. There is always something to spend money on – new clothes, new shoes, home renovations, car payments and much more. So you certainly don’t need to be saddled with expensive whole life insurance payments that deliver little extra value.
Whole Life Insurance Already?
If you have already been persuaded to invest in a whole life insurance policy, don’t feel that you are stuck with it. You can cancel your policy at any time, and get your expenditure back under control.
However, don’t cancel your whole life policy until you have a new term policy in place! You never know when tragedy is going to strike, so don’t risk it – even for a few days.
When taking out your new term life policy, you need cover until your youngest child reaches the age of 23. By that time, your whole family will have been through college and will be in a position to take care of themselves. Your home loan will probably be paid off by then, and you investments will be growing to a substantial sum. So if tragedy does strike at that time, the financial burden will be much lower.
Switching to term life insurance will save you many hundreds of dollars a month, but don’t be tempted to blow it all at the mall or on an expensive vacation. Instead, you should invest the money you are saving in a specialized investment fund – one that will give you maximum returns over the years ahead.
Protect Your Family Without Breaking the Bank
Life insurance is certainly important to every family, but it doesn’t have to be a major financial burden. By switching from whole life insurance to term life insurance, you can get the best deal for your family. That means you enjoy watching your kids growing up, while being secure in the knowledge that their future is protected, too.