Life insurance is classified into two policy types: term and permanent. Term life insurance, as the name implies, insures you for a specified length of time, often between 10 and 30 years. Your policy remains active as long as your premiums are current. When the policy’s term expires, coverage is canceled. You owe no further premiums, but you also do not receive any life insurance protection.
On the other hand, full life insurance covers you for the duration of your premium payments. Each premium contributes to the accumulation of cash value — money that can be borrowed against. Thus, in addition to the death benefit payable to your beneficiaries following your death, you can withdraw or bequeath cash to your heirs.
Here are a few points about whole life insurance that your insurance agent may overlook:
- Whole life insurance premiums are significantly higher than those for term life insurance, making it unaffordable to many. Often 10x the monthly premium.
- Tax-deferred growth, which brokers tout as a selling point, is also available through contributions to an IRA or 401(k) (k). “Invest the difference!”
- You’re stuck with the insurance company’s investment portfolio, which are often more conservative and offer lower rates of return than other investment vehicles such as 401(k)s or IRAs.
- A whole life policy may appeal to a limited market of individuals who lack confidence in their ability to save and invest money independently, or have estate planning needs (taxes). However, as soon as customers pay their first premium to the insurance company, fees may begin to erode any value they have accrued.
The issue is that there are a variety of other investing options that charge lesser fees and have a better track record of producing profits for the account holder (eg. S&P 500). Term life insurance offers the most cost effective protection for individuals.
