If you are like most folks, your day starts out with a rush to the front door to get to work. At work you will perform your tasks to the best of your ability so that you will receive money in the form of a paycheck. As soon as that money hits your bank account, there are about a thousand and one ways you can spend it. Quite far down on the list is a little thing we call life insurance. Everyone with any responsibility for other people knows they should have some, the question is what kind and at what cost. Today we are going to examine the value of your dollar in the Insurance world.
There is an endless debate about what kind of Life insurance is "best" and I am not going to try to end that debate. I do have a professional opinion and it is: whatever type you need. Each type of insurance sold today has a best use purpose and a professional should be able to sit down with you and get to the reason behind your desire for insurance and point you in the right direction. That being said, you will often hear pundits and radio personalities that say, "Term is the only insurance you should buy." or "Whole Life is a colossal waste of money." I thought I would weigh in on the cost of term versus whole life, hopefully in a way you have not considered.
To be clear, this is like comparing apples and oranges. These two products are very different but in one way they are similar and that is when you pay the premium you protect your beneficiary from the loss they would experience if you died unexpectedly. Let's look at Term Insurance first.
Term, as its name suggests, is insurance you buy for a certain period of time or for a certain purpose. It is very inexpensive. Some of the uses include travel insurance, shipping insurance, and life insurance. When purchased for life insurance, it is quite common to buy it in the form of 10-year, 15-year, or 20-year increments. I'm going to use 20-year term for this example because I think it illustrates the point better. I know the pundits will scream that if I use 10-year my argument doesn’t hold water, but they are wrong as you will be able to see, sorry.
Let's set up some parameters so we can take a clear look at your out of pocket cost for term. The subject is a 20 year old male, 6'1, 190, non-smoker. He has $150 a month to spend. The quote is from an un-named insurance company that sells both term and whole life. It is a mutual company.
His $150 monthly cost will buy a death benefit of $3,440,000.00. Yes, in case you thought that was a typo 3 million plus. When they say it is cheap to buy coverage they aren't kidding. I will just add that the 20 year old male would have to have a very high net worth to even qualify to buy that much insurance, but that is not the point; back to cost. At the end of 20 years this policy would have cost $36,000.00. He would have $0 dollars of coverage and zero cash because the term policy ends. If he wanted to keep the policy the new premium for the same coverage is $893.00 monthly. To buy $219183.00 of 20 year term at his new age would cost about $60.00 a month. The value of your premium dollar during the term is $3 mil+. The value of your premium dollar at one day past 20 years is Zip, Nada, $0. Hmmmmm, hope you are asking yourself a few questions.
Now, we will have the man buy whole life. $150 buys him $62,050.00. Wow! That is a remarkable difference. When they say whole life is expensive they really aren't kidding. To be clear, anyone healthy can qualify to get this amount of insurance so that is not an issue. This particular design is one of the most expensive death benefits you can buy without having the policy become an MEC, which I am not going to explain right now, because that is not the point; back to cost. At the end of 20 years this policy would have cost $36,000.00 just like term. He would have $40,055.00 in his cash value. Term does not have this benefit and as you can see the value is more than the cash outlay by a fair amount. His death benefit would have increased to $219,183. That is a little better and 20 year term does not give an increasing death benefit without also raising the premium. Hmmmm, looks like whole life might be cheaper or free over time, it doesn't disappear right when you might need it most, its death benefit gets higher over time if designed properly, and you never have to worry about being uninsured. The value of your premium dollar day one may not be quite as good but over time it does gain value up to and over 100% for every dollar spent, and at twenty years and one day it beats term hands down. That is good value for your premium dollar.
I would say there are two rules when it comes to life insurance. Rule one: don't be afraid to pay a high premium, your insurance may turn out to be free. Rule two: know exactly what you want and why, because if you don't you might end up paying a great deal of money for nothing. Another thing to consider is your reasons for buying it in the first place. Without these well thought out reasons you could pay much more than you need to for a benefit that won't do the job. A reputable insurance professional should know exactly how to design a policy either term or whole life that will fit your need so that you pay just the right amount of premium for the job the insurance needs to do. That is what I call putting your insurance dollar to good use.