Term Life VS Whole Life Insurance: Which is Right For You?

Should you buy term life or whole life insurance is a long standing debate in the finance and insurance industry. If you do an internet search, you will find a plethora of articles arguing why one product is better than the other. Some insurance and financial professionals lean more to the term life side and view whole life as a flawed product. However upon closer analysis, you will learn how it can be structured to be a very powerful instrument in helping you achieve your financial goals. A balanced view of both is required in order to make the best financial decision for your situation. 

When it comes to term life insurance or a whole life policy, it really depends on your circumstances. Depending on what you are trying to accomplish financially, one may be more suited than the other. If you are looking to satisfy temporary financial commitments such as dependent children, a mortgage, outstanding loans, especially ones that someone cosigned for you, then term life is more appropriate. It is also the easiest and most affordable form of life insurance you can get for a significant amount of coverage.

Whole life can be used to cover the same things as term life if you can afford the premiums that come along with a large policy/death benefit. This product is more appropriate for permanent financial commitments such as special needs children who will never be self sufficient, estate planning, covering key employees in a business and burial expenses. 

While it is more expensive, whole life has a great level of flexibility and customization, and its cash value component can be used as a powerful tool for wealth accumulation. Whole life policies that pay dividends can be used to practice a concept known as Infinite Banking. You are essentially being your own bank by structuring the life policy to focus on building the cash value at a much faster rate than normal. This type of policy's main goal is not to provide a death benefit to a beneficiary, but more so to build funds that can be easily tapped tax free within a certain limit.

The funds can be used to pay for a child's college education, purchase a car, fund a business opportunity, invest in real estate or create additional income during retirement. The funds in the policy can be accessed via withdrawals or policy loans. The loans don't have to be paid back and any outstanding balances will just be subtracted from the death benefit when you pass away. However, it is advantageous to you to repay it so you can continue using the full value of the policy for future financial needs.

Whole life policies come with guaranteed interest rates, but certain policies pay dividends which steadily increases, so the funds in the cash value will grow even in a recession with down markets. Some insurance companies are known as mutual companies where the policy holders own a portion of the company. When the company performs well financially, the policyholders are paid dividends which can be used to increase the policy’s death benefit and accumulated cash value. 

The use of what is known as a paid-up additions rider can also be used to accelerate the growth of the cash value. You are essentially over funding the policy which is done during its early years to accelerate its growth. After doing this for 5 to 10 years the policy will significantly grow and in 25 - 30 years you could have twice to ten times more death benefit and a significant stash of cash value at your disposal. This will all be dependent on how much the policy is funded, dividend payments and the insurance company chosen. Because of its tax advantages, wealthy people use these whole life policies to safely store and grow their money and people who don’t have their means can do the same thing. 

A whole life policy can be used to create what is known as a modified endowment contract. This financial instrument is used to pass on significant amounts of wealth to future generations and to preserve the full value of an estate that would go to a person's heirs.

Whole life tends to get a bad rap, often because the various ways it can be used are not fully understood. But as was stated at the beginning of this article, depending on what your financial objective is, term life or whole life might be more appropriate to suit your needs. However, it doesn’t have to be either or. You can purchase a blended policy that has a base whole life death benefit combined with a term rider to increase your coverage. 

For example, you could get a blended policy that has a base of $100,000 or $250,000 whole life death benefit with a term rider for $400,000 for a total of $500,000 or $650,000 in coverage. Since the term rider is cheaper it will be less expensive, while the whole life portion of the policy will be a bit more costly. But since you are starting with a smaller base whole life death benefit, the overall policy will be more affordable versus buying a full policy for either of those face values. By continuously paying your premiums, over funding it in the early years and allowing the policy to grow, later on down the road you could have close to $1,000,000 or more in death benefit, even after the term rider expires. At that point you will have enough cash value to no longer pay premiums and make the policy pay for itself.

Insurance can be complicated, but it doesn't need to be. Connect with a licensed insurance broker at AllCarePlans for a complimentary consultation and needs analysis to get the coverage that suits your needs. ​​