Whole Life Insurance vs Term Life Insurance

by Jeff Rose on February 26, 2016 · 4 comments

What’s the best? Whole Life or Term Life For Your 30’s? Many people say term is cheap and the cost of whole life insurance doesn’t make it worth it.cost of whole life insurance premiums

But who’s right?

Well the answer is not as simple. There’s one thing for certain, as you begin to get older life insurance becomes more important to you.

You have more things that you need to take care of if something were to happen to you.  Paying off your mortgage, kids college savings, and any debt you have can be a burden that you do not want your family to deal with if the unthinkable happens.

Life insurance is one of the most important purchases you can make in terms of securing your family’s financial security. Finding the right life insurance company and policy can be a long and confusing process. There are countless insurance companies such as Banner, MetLife and Prudential that offer dozens of policies and coverage amounts. So how do you know which one to buy?

The Importance of Life Insurance

Before deciding on which plan is best for you, everyone must understand why you need life insurance and the disadvantages of not having a policy. The purpose of life insurance is to replace the salary of a loved one and provide for a family that relies on that salary. You do not want to leave your family burdened under thousands of dollars of debt during this difficult time. Life insurance brings peace of mind knowing that your family will be taken care of if something were to happen to you or your spouse.

How much does life insurance cost?

One of the first questions everyone asks when looking for a life insurance policy is, “How much does a life insurance policy cost per month?” or “How much should I be paying for life insurance?” Many people are worried about paying too much for their life insurance coverage. The average life insurance costs between $500 and $1,5000 every year, which translates to around $40 to $150 in monthly premiums depending on the type.

What impacts my life insurance costs?

Several factors go into the cost of your life insurance rates.

  • Age – a younger applicant will have lower costs than an older applicant. The average life insurance rates change drastically by age.
  • Gender – because women have longer life expectancies, the average costs of life insurance for women tends to be lower than the costs for men.
  • Health – your overall health and family history will play a significant role in your monthly insurance costs. Having any chronic illness, diseases, or a family history of conditions can cause your health insurance costs to go up.
  • Your job – what you do for a living can change your monthly premiums. A person that sits behind a desk will pay lower premiums than someone that has a high-risk job.
  • Your hometown – the state that you live in will have an impact on your monthly premiums. For instance, Alaska has much higher annual rates than Montana.

The type of policy you get will also drastically affect how much you pay for the insurance coverage. Obviously, the more coverage you buy the more you will pay every month. The price will also depend on if you get a whole life policy or a term policy. If you get a term policy, the price will depend on the length of the term, 10, 20, or 30 years.

What are My Options?

Term Life Insurance can be a great way to protect yourself. Term insurance is a life insurance policy that is only good for a certain term, or amount of time such as 10, 20, 0r 30 years. Term life insurance does not let you borrow against the policy or generate any kind of cash value, unlike whole life policies.

Term insurance is also the cheapest form of life insurance for these reasons. Since life insurance companies do not have to manage anything for you this cuts the rate they can offer you on the policy.

Term Insurance is just a great way to protect yourself during the years when you will have major expenses such as a mortgage and kids.  When you need a very large death benefit to protect the financial future of your loved ones, a term life insurance policy will help you save money over a permanent policy, but once the term period is over, you will have to purchase another policy that will have much higher rates.

Example of $250,000 Term Life Insurance Policy

Here’s a quick look at the cost of 30 year term policy for a 30 year old. It breaks down to be $21 a month.

$250,000 Term Life Insurance Policy 30 years

Term is Cheap

Whole Life Insurance

As you get older the need for a more permanent life insurance plan seems more important. A more permanent policy can help pay for your final expenses past the life of a term policy. For those that can afford it, Whole Life Insurance is a great way to protect yourself and have cash values that grow every year, especially for younger adults that can afford the higher premiums now to enjoy fixed premiums as you age.

A Little Bit More About Whole Life

A whole life policy is a policy that last till age 100. A whole life policy also generates a cash value. This same cash value is the basis by which the insurance company will loan to the policy owner. The loan is collateralized by the cash value. The insurance company will not lend the policy owner more than the total cash value. Through the policy loan provision, a policy holder can access the cash value without incurring taxes. This cash value is an excellent option if you are ever in need of a loan because of unexpected emergencies.

This is because policy loans are treated as debt, which is not a taxable distribution. The Insurance company does however charge interest on the outstanding policy loan but do not require payments to be made. However, an outstanding policy loan will reduce the overall available cash value and if death were to occur with an outstanding policy loan, the loan would be paid back via the death benefit proceeds.

Here is an example of a $250,000 Whole Life Policy

Here’s a quote I ran on a 30 year-old with the same coverage. As you can see it comes to be considerably more. On a monthly basis, it comes to be $286.66. In case you were curious, which I’m sure you are, that’s $265.66 more premium dollars per month of a whole life policy vs. a term policy.

The difference between plans will change depending on the insurance provider, but around $250 a month is a normal difference between policy types.

Cost of Whole Life policy $250,000

Cost of Whole Life is Much More

But how do these differences translate into real world insurance companies? To give you an accurate picture on the various costs of whole life insurance premiums, I also ran quotes for males and females and different ages seen below.  To make it as accurate as possible I used MetLife as the main carrier for the comparison of whole policies between men and women and just gave the least expensive plans possible in the whole vs. term comparison.

Cost of Whole Life Insurance for Males and Females

GenderAge$100,000 Whole Life$150,000 Whole Life$250,000 Whole Life
Male25MetLife
$825
MetLife
$1236.50
MetLife
$1987.50
Male30MetLife
$1010
MetLife
$1490
MetLife
$2395
Male35MetLife
$1202
MetLife
$1778
MetLife
$2842.50
Male40MetLife
$1449
MetLife
$2148.50
MetLife
$3440
Female25MetLife
$765
MetLife
$1122.50
MetLife
$1795
Female30MetLife
$1904
MetLife
$1331
MetLife
$2137.50
Female35MetLife
$1071
MetLife
$1581.50
MetLife
$2540
Female40MetLife
$1306
MetLife
$1934
MetLife
$3105

As you can see, Metlife whole life insurance policies have varying rates depending on your age. Metlife’s whole life insurance policies reflect the average costs of a typical whole life coverage plan.

Cost of Whole Life Insurance Vs. Term Life Males and Females, 20, 30, and 40 years-old

GenderAge30 YR Term Life $250,000Whole Life $250,000
Male25Banner Life
$212.50
MetLife
$1987.50
Male30Banner Life
$225
MetLife
$2395
Male35Banner Life
$252.50
MetLife
$2842.50
Male40Banner Life
$342.50
MetLife
$3440
Female25SBLI
$177.50
MetLife
$1795
Female30Banner Life
$190.00
MetLife
$2137.50
Female35Banner Life
$222.50
MetLife
$2540
Female40SBLI
$277.50
MetLife
$3105

While Metlife has good rates for a whole life insurance policy, you can see the difference in the types of plans. Because of the cash value added to whole life policies, they are drastically more expensive than term policies.

Does the Cost of Whole Life Insurance Make it Worth It?

While I’m sure there are situations where whole life insurance makes sense, it’s hard for me to see that for a 30 year old.

While the cash value of a whole life insurance policy is convenient if you ever face a financial crisis and need a loan, the added cost may not outweigh the convenience. The money that you save on monthly premiums can be invested in other ways that make more sense than accumulating cash value in the whole life policy. In the end, you have to decide with policy works best for you. There is no “one-size-fits-all” option for life insurance. Consider what is most important to you at your stage of life. Spend some time receiving quotes from insurance companies for both whole life and term life insurance policies.

Regardless of which type of policy you choose, you should not put off buying life insurance any longer. Do not risk letting something happen to you and leaving your family financially stranded.

Right now I’m sticking with my term policies although I am considering a indexed policy as another investment option. Stay tuned for that.

{ 4 comments… read them below or add one }

Andy Beasley September 28, 2013 at 9:32 pm

Whole life for a 30 year old from New York Life or Northwestern has many uses and should be a part of every young persons portfolio. While it does not make sense to cover their entire life insurance need with whole life, it certainly makes sense for a young person. A $250k term for a 60 year old, if they can qualify, would be well above the cost that someone who planned ahead pays for their whole life policy even after thirty years.

Plus, thirty years of cash growth would be substantial, even in poorly performing policies. Not to mention the death benefit would be considerably larger if they chose paid up additions. So, if it makes sense budget-wise why would you not recommend having permanent coverage in addition to temporary? What does not make sense is recommending anything indexed and how you have made it as a financial planner having no intellect regarding life insurance.

I think you like the commission check that comes with indexed products instead of logical and concise customer-oriented advice.

Reply

Jeff Rose September 29, 2013 at 10:22 pm

Whole life for a 30 year old from New York Life or Northwestern has many uses and should be a part of every young persons portfolio. While it does not make sense to cover their entire life insurance need with whole life, it certainly makes sense for a young person

This one of the most reckless statements involving life insurance that I’ve heard and I can only assume you’re an insurance agent that pushes whole life insurance on unsuspecting individuals. Every young person that I’ve encountered that has been sold whole life insurance 1. Does not have enough term life coverage to begin with and 2. Is not saving nearly enough in their Roth IRA’s or 401k’s.

Why? Because they’re sinking every last dollar they have into their overpriced whole life policy.

I’m 35 years old and there has never been an instance where a whole life policy made sense for me and my family. I have a $2.5m term policy that will take care of my family until I’m 64 and will be self-insured by the time the policy expires. This is the same strategy that I advise to all my clients.

I think you like the commission check that comes with indexed products instead of logical and concise customer-oriented advice.

Hmmm….I could say the same to you for pushing whole life insurance over term. To this day, we’ve had only a handful of clients (<5) that have bought indexed insurance and that's because that's what they wanted. 99.95% of our clients buy term life.

What does not make sense is recommending anything indexed and how you have made it as a financial planner having no intellect regarding life insurance.

The only insurance product that I recommend over anything over is term. I present indexed as an option. I’ve made 10 years as a planner because I present my clients with options and let them decide what’s best for them while never pushing propriety products.

Can you say the same in your less than 3 years experience?

http://www.brightscope.com/financial-planning/advisor/868324/Andrew-Beasley/

Reply

Angela Bui August 3, 2015 at 3:05 pm

I would like some insight. I am currently spending $175 a month for a $250,000 whole life policy. My boyfriend is concerned that I’m spending WAY too much for insurance and my agent just wanted to make the commission. Please advise.

Reply

Jeff Rose November 10, 2015 at 3:55 pm

@Angela Yes, you are spending WAY too much. Please contact us so we can review your options.

Reply

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