Whole Life Insurance vs. Term Life: Which Is Better For You?

Are you wasting your money on whole life insurance? As we do financial plans for our clients, a big question that arises often is, should I have this type of life insurance, which is called whole life insurance? And I get it. There's a lot of insurance companies out there that sell whole life and universal life and variable life. And we're not going to get into all types of life insurance today. There's another video for that. But today we want to talk about whole life specifically versus term life. Now, do I believe life insurance is important? Yes, it plays an important role in a financial plan. I have life insurance for myself. You have life insurance for yourself. And there's a few different traditional reasons to traditionally have life insurance. Number one is to replace your income. If you die prematurely, I contribute financially to my household. So if something happens to me, there's a void financially that I leave behind to my heirs, to my spouse and my children. So I don't want that to be the case. So I have life insurance to replace my income or what would have been my income and had I still been around. So it's income replacement is one traditional use of life insurance. And number two is, you know what? I haven't had the time to build up a large estate or anything. I want to leave an inheritance. I want to leave something to my children. So I might buy a policy to be able to make sure that when I leave, they may not be burdened with burying me or may have a little something extra to remember me by. Okay, so leaving an inheritance might be a reason to buy some life insurance. This one used to be more prominent, maybe when, you know, depending on the timing of it, when you see this video, when the tax laws change, okay. But it used to be that a strategy to minimize the impact of inheritance taxes, state taxes, okay, was to leverage a life insurance company by buying a policy. And when you die, if you had a state tax, then the insurance policy would pay that off, leaving your assets untouched to go to your heirs. That's changed a lot depending on what the tax exemption is for state taxes. So not as prominent anymore, but I just threw it in there for, you know, the 2% of America today it would apply to, okay. And then another element that people throw out there is, there's some legislation that allows for asset protection of cash value inside of an insurance policy. So these are the usual reasons to have a policy. Now, what happens, a lot of people say, well, term kind of stinks because if I put money there, and once I stop paying it, I don't need it. I don't get back any money. I don't have anything back. So that was a waste of money. Well, understand again, for the traditional reasons, you are saying, if I die today, I don't have enough in assets to leave my heir. So I'm going to have an insurance policy in place. But hopefully over time, if you've got a good financial plan, you're increasing your assets where you will have something to leave behind, not needing the insurance anymore. And then, great, it was just protection, kind of like car insurance, house insurance, you hope you never need it, but if you have it, just in case you do. Right. Okay. So that's the argument against term life insurance. But again, if you use it for that purpose, it's the cheapest, inexpensive way to make sure you protect your family. Other reasons might be, well, if I have a whole life policy, I could technically borrow money against it in the future and use that as supplemental retirement income or for education. It's become the Swiss army knife of financial planning, supposedly, because these policies can do it all. You can get retirement planning, education funding, buy a home planning, everything planning. One, be careful of that, because there are very strict restrictions on the usage of the cash. You can't ever go beyond a certain amount or it blows up and it's taxable. And when you say you want to use it for retirement supplement, there are some limitations because when you put money into an insurance policy, there's what's called insurance premium tax. At least in the state of Florida, every dollar that goes in there gets charged 1.75%. So, if you put $100, you're already starting off with $1.75 less invested, save for the future. Same thing, multiply that by 10 for 1,000, 10,000. So, all your premiums are going to get taxed before your money gets used for any type of savings vehicle. So, is it the best investment vehicle? I'm not sure. And understand that even to access the money, you're not just taking it out. It's on the books as a loan and it has to be done very carefully to make sure that it doesn't blow up the policy. And you have a payment schedule to pay it back. And you have a payment now. They'll say you don't have to pay it back because after a certain amount of years, it's paid up and et cetera. So, again, don't want to get into the intricacies of too much detail, but now you see how term versus whole life works and you're starting to see some of the challenges and pros and cons of each. I'd like to actually run through an example of what if I've decided the term route, what would I be looking at versus if I decide the whole life route? All right. So, let's look at example. So, we're going to take Ryan and Maria. They're 30 years old, which is usually the time you kind of start thinking about getting life insurance. You just got married. You're having kids. Then you're thinking about, okay, well, what happens if I die? I want to make sure my wife or my husband is okay. And they can get the kids through school and get them through college. So, we need to get life insurance. All right. So, let's take a look at two different scenarios. One is looking at a whole life policy for a million dollar benefit or a 30 year term life policy. Okay. Again, this couple's 30 years old and they're buying either whole life or term life, two different examples. So, for the whole life policy, it has a death benefit of a million dollars and the premium's around $10,580. A year. A year. And this assumes that you are super preferred health. They have different categories of your health status. So, it could be a lot more expensive if you're overweight, have certain health conditions that could cause your premium to be more expensive. But we're going to be apples to apples here and use the super preferred health for both the whole life and the term policy. Okay. So, the term policy costs about $670 per year. So, you have the whole life that's $10,580 versus the term life of $670. Okay. So, now we're going to think about this mentality of, well, instead of just buying the whole life, which that does have a cash value that grows. And as you can see in this example, after 30 years, it grows to $326,000 approximately. All right. So, you're covered for a million dollars, but then that cash value is growing over time. And then when you're 60 years old, you have approximately $326,000. So, that's one scenario, the whole life insurance. Now, the second scenario is, well, what if we got a term policy for 30 years and then we invested the difference? So, you pay the $669 and then you invest the difference from the $10,580 you would have spent for whole life minus that $669. And you invested that in an aggressive portfolio, which is usually what you would be in. Not always because people's risk tolerance could be different depending on how you deal with market fluctuations. But in this example, for a lot of 30 year olds, that's kind of the portfolio that they're in. So, in that scenario, let's look at this chart to see what it looks like if you were to do that. So, in this chart, you can see that if you were to invest that difference, which is $9,911 a year, and you got a return in an aggressive portfolio over time, and this is actually using what that portfolio would have done over the last 30 years. And you can see the fluctuations of a 2008 or the tech bubble from 2002 and the inflation in 2022, all of those scenarios. If you were to do that, the money that's in that portfolio is now $1.85 million. So, you have $1.85 million if you do the term policy scenario, or you have $326,000 if you do the whole life policy scenario. Which one sounds better to you? I mean, there's no question. And we want to disclaim, it's not really apples to apples in terms of the amount of money you're saving or using to buy insurance and saving. But obviously, the reason there's a big discrepancy is because whole life, and this is the case or argument that's made for whole life, that if you're using it for savings, it's the safe money. So, that's why historically, they've grown at about 4% or 5%. Some companies say, oh, we've done six. When you take away charges and all that, it doesn't net to six. But one growing at four to five, you get 326. One growing at eight to 10, you get over a million. So again, not everyone's ready to take that level of risk. We get it. But obviously, there's a big discrepancy or disparity between one versus the other that you need to be aware of before spending this amount of money. Because the challenge is, once you get into a whole life policy, once you get into these cash value policies, you're kind of locked in for a few years before you ever start seeing progress on your accounts. You might be in it and say, oh man, this doesn't make sense. So what do you do, Jason, if you are in one of these policies, and then you do a financial plan, the advisor says, you don't need to be, that's too much money. And you're saying, whoa, I could have a million dollars instead, potentially. What should I do in that scenario? Yeah. So in that scenario, the most important thing is before you surrender, it's called surrender when you basically cancel the policy, and then you can pull out what's in the cash value. So before you surrender, you want to make sure you get covered by a term policy for the amount of life insurance you actually need. Assuming you need insurance. Assuming you need insurance. So you get the other policy in place first. Once that's done, then you can actually surrender the policy, not have to pay the premiums anymore, and then use that cash value to help you out wherever you are. If you need to pay down debt, if you want to invest that money. So that money can now be used to do pretty much what you need to use it for. So one thing that people may throw out as an objective, well, after the 30 years, if I had the term policy, then I have no more life insurance. So what do I do then? Well, the thinking behind that is typically you need life insurance to get your kids through college and give you time to build up so that, like you said earlier, you get in a scenario where you don't need life insurance anymore. If you built up a portfolio that's almost $2 million and along the way you've also paid off your house and you have no more mortgage, well, if something happens to you, you have $2 million. You're now self-insured and then your spouse can use that money as if they were going to use the death benefit of the policy instead. Now, again, talking about getting out of this, you talked about if you get out, make sure you're insured first, that before you take that cash, you can do that cash for something else like paying off debt, maybe more efficient use of the money, depending on what your financial plan says you need. The biggest challenge I see though, Jason, is what people have just gotten into this a year, two years into it, and there's not a lot of cash value there, if any. And they say, you know what? Because there's what's called a surrender charge. So they say, man, I've put in $20,000 or $10,000 in this thing. If I surrender, I'm going to get one or nothing or two because there's a penalty for getting out soon. So what I tell people in that scenario, I say, listen, if this doesn't make sense, rip the band-aid. Why prolong something that doesn't make sense for potentially a short-term pain? That's okay, yeah. Because what's my alternative? Well, keep putting $5,000, $10,000, $15,000 in this thing knowing that I'm going to be in it for the long term and it doesn't make sense for me in the long term. So I've told people this is hard, it's a tough pill to swallow, but if you're in that scenario, rip the band-aid, cut your losses, and move on. That's right. And one thing that you want to think about as well, well, you know, in the scenario where you had some type of health event happen and you had cancer, you had some type of major health event, you know, this example that we're giving may not work because you may not be insurable anymore. You may be kind of forced to keep that whole life policy. That's another thing you want to consider. So there's a lot of considerations, but hopefully this helps you think through this term versus whole life reading more sense for you. We hope this is helpful. If it is, please subscribe with the button below so that you'll get notifications of future videos.