For generations a debate has raged on over whether it’s best to buy whole life insurance or to buy term life insurance and “invest the difference”. Proponents of each method are adamant in their positions and both offer sound reasoning in their answers. But, for anyone to tell you which is best for you without knowing anything about you is tantamount to someone telling you which road to take without knowing where you are going.
The answer to which is best for you lies wholly within your answer to the following question: How long will I need life insurance coverage? It’s a key question that gets to the heart of the debate and why a person would use one method over the other.
Term proponents will tell you that the need for life insurance goes away once your children are grown and graduated from college, so it only makes sense to buy “pure” insurance coverage with the lowest possible outlay. Once the children are fully grown and your policy expires you’re only concern is for your retirement. It’s a simple scenario and, if it were to actually hold true for you, then, perhaps, the term life method would be the most appropriate.
Now let’s add some “what if” factors and see if, in hindsight, it was the correct decision. What if:
Your spouse becomes disabled and is unable to continue to earn a full income?
One of your children turns out to have some special needs that require ongoing medical care?
You realize all of your dreams and amass a large amount of wealth which will be subject to substantial estate taxes when it is passed on to your heirs?
You build a successful business with partners and one of them dies and you need capital in order to buy out the family members?
Before you simply answer with “I’ll just buy some more insurance”, let’s add one, very critical “what if”. What if your family’s medical history caught up with you and, at some point, you become too high a risk for an insurance company to offer you a policy that you could afford or, it couldn’t offer you a policy at all.
Whole Life Insurance Addresses the “What Ifs”
Sound life insurance planning takes into account the unavoidable fact that “life happens” much in a way that most people can’t foresee. Should any of the “what ifs” become a reality, the need for life insurance may never go away. In this context, when you fully understand how whole life insurance works, you may find that it offers the best long term solution for your life insurance needs.
A whole life insurance policy consists of a death benefit element and a savings, or cash value element, both of which are fixed and guaranteed. The premium is established at the time of issue and remains level for as long as you own the policy. In the early years of the policy, when you’re insurance cost are lower, a larger portion of the premium is applied towards your cash value accumulation which is allowed to accumulate interest and dividends tax free.
As your cash value increases, the risk to the life insurer decreases because they are only obligated to pay out the death benefit and they retain the cash value at your death. So, their net obligation is the difference between your cash value accumulation and the death benefit. As a result, in the later years, your cost of insurance actually goes down which means that more of your premium dollars are applied to cash value growth.
At some point, your cash value accumulation triggers two very important events within your policy. When it reaches a certain level, anywhere from 15 to 25 years into the policy (depending on your age), your policy effectively becomes paid up, which means, you could stop making premium payments and allow your cash value, along with participating dividends paid by the company, to pay the annual premium.
The other significant event is that, when your cash value reaches a certain level, it actually starts to push your death benefit higher. From that point on, your death benefit will increase each year as your cash values increase.
For Lifetime Insurance Needs Whole Life is Best Option
For the person with the planning foresight to know that the need for life insurance may never go away, whole life insurance would offer a lower cost of ownership than a term life policy, or a series of term life policies that were purchased and held for a period longer than 30 years.
Whole life insurance also provides a living benefit in that your cash value is always accessible via a loan from your policy. When the emergency pops up, or your business needs capital, or you need to spring for a wedding, you simply borrow the money from yourself and, you only have yourself to repay. Any unpaid loan value would be deducted from the death benefit.
For anyone considering the purchase of life insurance, playing the “what if” game is not an exercise too be taken lightly, because, after all, “what ifs” are simply unforeseen life events that happen to all of us.