Term or Whole Life?
Term vs. Whole Life Insurance: Which is Better?
Term life insurance versus whole: which is better for young adults with children? The two policy types are designed to address needs of differing time frames. Your answer depends upon circumstances and needs.
The answer also depends upon your risk tolerance, ability to stick to a financial plan, and your health over time. You may have heard the phrase “buy term and invest the rest”.
Term vs Whole Life Insurance: Temporary Needs
Term life insurance addresses the "IF" as we walk this earth. It is better when the need for coverage will disappear at some point, such as once college expenses for your children have been put to rest. It addresses the question of: "what if I die before paying for the kids’ education?", or "what if I die with no assets for my spouse to draw upon?"
Term life provides a larger death benefit for your premium dollars when compared to whole. There are two reasons that your death benefit will be higher:
Your term premium buys a death benefit only, whereas a portion of your whole premium goes to build cash value over time.
You will probably outlive the term of your policy, meaning the odds of the insurer paying a claim are much lower than with whole: a permanent policy. Young adults are expected to survive their contract.
Whole Life Insurance or Term: Permanent Needs
Whole life insurance is designed to be permanent coverage. It is better for the "WHEN" of our existence: when the children finish paying for college, when I am no longer a young adult and retire, and when I die. Cash value policies are designed to be in place when these events occur.
The cash accumulation inside a whole policy can help cover college expenses or fund your retirement while simultaneously providing security in case you die before reaching these milestones.
Start a policy when your child is born, and allow for twenty years of cash value to accumulate inside the policy on a tax deferred basis. If you die early you have covered a portion of the college expenses, or you can borrow against the policy cash value without needing a credit check.
When you reach retirement age there will be cash value inside your whole life policy. You can cash out the policy to fund retirement expenses, take a loan, or continue with the policy.
When you die your policy will pay the death benefit to your heirs.
Whole contracts can be better over the course of your lifetime than buying a series of term life policies. Term contracts become very expensive as we age, and often is not available to people in older age brackets, or with health issues.
Invest the Rest?
The term versus whole life insurance debate often boils down to can you make the “buy term invest the rest” argument work for you. Term is the best fit for you depending upon your risk tolerance, ability to stick to a financial plan, and how healthy you can stay over time.
Term life combined with a disciplined investment strategy will often provide a greater internal rate of return than will whole life. Unless of course you are risk adverse, fail to make regular investments, or become disabled.
Risk tolerance is also an important component in the term or whole debate. When you invest the rest, you are investing in stocks and bond – securities that may be higher in risk and subject to market volatility. Whole life provides a guaranteed rate of return. It is a more conservative option over time.
Consider also your ability to stick to a financial plan. Buying term and investing the rest makes sense if you actually make the investments. But many people lack the discipline to regularly put money aside into investments. It sounds great in theory, but often falls apart in practice. Whole life comes with a penalty to motivate otherwise undisciplined people – the policy will lapse if you don’t continue making premium payments.
The strongest argument supporting whole versus term is your ability to stay healthy over time. If you choose to invest the rest, what happens if you get sick or hurt and become unable to work? For most people the answer is “I stop making periodic investments because my income disappeared”. Whole allows you to purchase a waiver of premium rider, which will continue your policy if you become disabled. Your investment advisor won’t do this for you.