The Differences Between Term Life Insurance and Cash Value Life Insurance
Earlier this week, we discussed if you need a life insurance policy, and how much you might need to be covered by. For those of you looking to purchase life insurance, you’ll quickly realize that there are many options available to you – term, whole, universal, variable, and so on.
The Two Categories of Life Insurance
Forget all the fancy names out there to confuse you, there are really only two types of life insurance policies:
Term Life Insurance
Term life insurance is simply paying a set annual premium each year to cover you for a set dollar amount that you select. If you are to pass away, your beneficiaries will collect on the amount that you selected. Your annual premium will not change, nor will the value of your policy unless you change it yourself or your policy expires. Policies typically run 10, 15, 20, 25, or 30 years in length.
Cash Value Life Insurance (aka Whole Life Insurance, Variable Life Insurance, Universal Life Insurance)
Cash value life insurance policies include universal, whole, variable, and any other trendy name other than term life insurance that you may encounter. These policies involve paying for premiums, much like term insurance, but also include a contribution of a portion of your premiums towards a separate account that accrues value over time. Getting insurance coverage, and getting cash back if you don’t need to use it. Sounds great right? Let’s take a closer look .
Why the Salesmen want you to Buy Whole (Universal Life) Insurance
On average, you generally will pay a premium of about 7-10 times what you do for the same amount of term coverage (it’s more than irony that salespeople make a significantly higher commission on cash value policies than term). Salespeople are great at talking these policies up and appealing to your emotions. Don’t let them do it! Essentially, cash value policies are meant to be held for life. A small portion of your premium goes towards your insurance coverage, while the large majority goes into a forced savings account.
You can think of holding your cash in a forced savings cash value account much like keeping your money in an old 401K from a previous job where you only get a few investment options. Not to mention that your fees probably will be much higher. With a little homework you are better off converting that 401K to an IRA and investing in just about anything you like. In my humble opinion, the better choice is clearly term insurance in EVERY situation.
How Much Does Term Life Insurance Cost?
My wife and I went life insurance shopping a few years back after we got married and bought our first house. At the time, we were both covered by 1 times our annual salary at work, which would have been enough to cover our smaller debts, but not our mortgage (and neither of us would have been able to foot that bill on one salary). We were both in our mid 20’s and in good health, so we were able to get ‘preferred plus’ (best) rates. We each purchased a term plan worth $250,000 from AIG (enough to cover our mortgage and any debts). We both ended up paying less than $12 each per month. Essentially, for the price of a cheap dinner out each month, we had the peace of mind knowing that the other was safe in the unfortunate circumstances.
Where Can I Get the Best Price on Term Life Insurance?
My first recommendation would be to check a few of the many term life insurance comparison sites out there. Don’t buy anything that doesn’t require a medical screening, as you can pay up to twice as much for these plans. Also, if you are in good health, choose ‘preferred plus’ or whatever their best health category is. Don’t lie about anything, these companies have ways of finding out if you’re telling the truth.
Get Many Life Insurance Quotes
Shop around for life insurance.
Once you get your price quotes, I would then recommend checking with your HR department at work to see if they have an option for you to purchase a higher amount of coverage than they are currently giving you (called supplemental life insurance). Compare your employer’s offer with your previous quotes. You may also want to check with whatever company covers your home or auto insurance to see if they have a good offer as well. Go with the best deal you can find, but make sure that it is a legit company with a good reputation (so you’re assured that they will be able to pay off your policy in the event that they have to).
Life Insurance Discussion
- Where did you find the best deal on your life insurance policy?
- How much coverage did you purchase?
Good post. Some policies are essentially both. Term life pays a sum to the beneficiary when the insured dies during the coverage period. Cash value life provides a variety of features and benefits in addition to the death benefit of a term policy. Cash value life insurance policies have a savings element built into the policy that accumulates over the life of the policy. The insured usually has the option to withdraw, invest or borrow money against the value of the cash value life policy. Term policies are usually less expensive than cash value life policies.
This is good information by author he is missing a big truth about term policies that historically only 6% term policies pays death benefits and one third of consumers leave the term policy wasting all the money those years . So I will tell all these pundits that main purpose of life insurance is to leave money for next generation will term policies can accomplish this objective certainly not . Consumers need to see affordability buy what they can afford buy from highly reputed company but cash value policy is only policy which pays the person who bought it while he is alive and pays his family if I case he dies too yearly .
The experts need to be impartial when they are giving opinion and not make it
I hope this helps
I would agree with the author that term insurance beats cash value policy hands down. There are a few key drawback on cash value policy. (1) it increase your monthly cash outlay with no clear benefits over term insurance + invest the rest. This would require increase in emergency cash required if you take the recommended 6 months. (2) for cash life insurance, you will get full payoff only upon death, even after you hit retirement age. Otherwise, you have to surrender the policy at a discount. What a rip off…. (3) your life insurance need changes over your lifetime as your dependents changes and ages. For example, insurance need if your child is 1 year old vs 18 year old is different as your 18 year old kid will be 17 years closer to self dependence. Cash value policy usually do not provide cheap solutions to downsize the insurance cover. (4) financially, you are likely to be worst off than term + invest the rest since you can put the cash from ” invest the rest” into a tax deductable account such as 401k….
Also remember that you will be taking the credit risk of the insurance company for your lifetime if you sign up to cash value life policy. It can be more than 50 years if you start your policy young, say 30 years old. For those of you who still remember the near collapse of AIG in 2009…… I would rather not bet on that.
I am having trouble getting a consistant opinion from financial minds on what retirement options are best if you make too much money to fund a Roth IRA. I already max out my 401k, I already have my cash reserves and I am ready to grow my retirement further and fast to retire earlier.
I’m stuck between going towards a tradtional IRA where I have the freedom to invest where I want, but im capped on age… Versus… A cash value policy where my returns are fixed. BUT, I get the benefit of a life policy, and I get the cash value plus interest earned at any point regardless of age.
Could you please provide some thoughts on this matter…
@ 30 something – I have actually chosen a traditional IRA over a roth, so I’m not sure that I would consider it a downgrade, if anything it allows you to save on your taxable income now (and it sounds like you have a decent income).
As far as where you should go beyond that, I’d consider taking a look at index or mutual funds and buying them through a discount broker. Cash value life insurance is rarely a good investment in any way.
At current tax rates (through 2010), it actually makes sense to build up more money in a Retail account after you have maxed the 401k. (In Jan 1 2011 the current tax laws sunset and we are going back to higher tax brackets). Cash on hand is definately usefull especially as you plan for a home and family. I like real estate investing myself.
As for insurance, there are different Cash Value insurance options, but you can also look at using annuities to grow assets on a tax defered basis. Annuities can be tricky, but today you can find good variable annuities with low costs, some even have costs lower than retail mutual funds with similar returns. Annuities are nice because when you annuitize them you are GUARRANTTEED money for the rest of your life. Ask a retired person if they want to take a lot of risk, or if they’d rather have solid predictable income.
The important thing is to realize that different people are in different situations. It is unwise to suggest that one way is the best for everyone. In fact many banks and major holding companies use Cash Value life insurance to produce stable ongoing returns. (If major financial institutions are doing this to hedge risk, would it make sense that some educated Americans would want to do the same?)
One thing that wasn’t mentioned about traditional cash value insurance is that the cash value does not drop. It grows at different rates, but you won’t loose your money like you can with investments. (And legally, we aren’t allowed to call traditional cash value insurance an investment because it doesn’t fluctuate negatively.) There are Variable Cash Value policies which invest in mutual funds inside of the life insurance and have become quite popular also, but this is another topic….
The most important thing to realize is that not all cash value insurance, or annuities are the same. One must do research on the company and ask the salesperson or agent or financial advisor to give not only historical references but also a current day evaluation of the financial strength of the life insurance company they are presenting.
While Buy Term invest the difference is great, but it has several flaws. What happens if you outlive the term? What is the cost of insurance after the term period? Can the advisor put in writing the future gains of a mutual fund? If an Advisor says he can GUARANTEE future returns on a mutual fund, then run away! What happens if I want to add MORE money to my IRA on an annual basis? How much do I need to have at retirement? When will I run out of retirement money? Will my 401k/IRA contibutions be enough to get me to the goal? How about my estate tax, how much will go to the IRS? Cash value insurance can answer these questions with Authority in spades. Buy Term Invest the difference crusaders can’t answer these questions with any authority because they only look at on small aspect of the huge financial planning picture: the cost of insurance. They miss the lost opportunity cost of Triple compounding, Tax-Free Income, Estate Taxes, Increased Premium rates AFTER the Term period on Term Insurance, and the instability and inherent risk of Investing in Mutual Funds. They get you focused on the Insurance Agent’s “GREED” instead of focusing on the greed of the IRS, Brokerage Houses, and the people who promote these simpleton concepts. Buy Term invest the difference crusade was excellent in the 70s, but it is over. There are TOO many excellent products and concepts to locked into just this ONE financial plan. Buy Term invest the difference is a EXCELLENT starting point, but I would not want to finish there.
Really well stated.
The Buy term + invest the difference makes more assumptions than ANY of us should be comfortable with….much less make life-long planning decisions on.
My planning includes multiple buckets…with as many tax preferences as possible; as many growth opportunities as possible, as many “safety nets” as possible, etc.
Roth, 401k, Whole life (paid up in 20 years, versus the traditional life-long premiums), term life (while i have business/personal/mortgage debts and a growing family)….and other prudent investment (annuities, retail Mutual funds).
Don’t run away from higher cost products….because they have great long term value. Sure the “price” of term is 1/8 of the “price” of Whole life, but the “price” to buy the next one (assuming you are insurable) will WRECK the whole model…at just the time you need the most from your dollars. Check it out.
The differences between term and whole (permanent) only compare to benefits with the persons that is buying what their situation is. For ex. one individual may look at term life insurance because at the time they are under a budget and want to be able to determine the rate and time period in which they will have to cover the cost. The other way is if someone is looking to invest into whole life insurance and as the time passes, their investment can gain in value. Like if you were holding any other investment the value of it is what you look to have a gain in.
Regardless of whether you opt for term life insurance or go with whole life, the most important thing is to shop around and compare rates. I bought a policy through ReliaQuote.com, but I also had good experiences with SelectQuote.com and Insurance.com. And, I hear a lot of radio advertisements for AccuQuote, although that’s just since I bought the policy. Long story short, no matter which way you go, taking a few minutes to look at multiple locations will save you money in the long run.
Honestly, I think it’s better to talk to your local independent agent if you want to be taken care of.
Thanks for this post.It helped me learn so many new things
about life insurance.Lets us share our knowledge about life
insurance and how to get the best quote possible for a life
insurance policy as per individual requirements.
Good intentions, but I feel this article may be misguided. Everyone’s situation is different and what may be good for others, doesn’t make since for everyone. Permanent life insurance – when bought from a solid mutual company that participates in distributing dividends to their policyholders – can be a great addition to many portfolios. The fact that you are comparing these financial products with 401(k)s and IRAs is misleading. Most people in their twenties would be heavily invested in equities. The general accounts of a life insurance company reflect a MUCH more conservative asset allocation, typically limiting equities to just 10% of the overall portfolio.
(Dean, you hit the nail on the head) As for the tax treatment of the two vehicles, you must question whether a 401(k) or IRA is the smartest tax strategy. With a rising federal deficit and historically low tax brackets, the general consensus is that taxes will go up in the future. So you’re deferring all of your taxes to when the tax rates may be higher? Doesn’t make sense to me. The smartest thing to do would be to diversify both in pre-tax and after-tax investments, because we can only guess at what taxes are actually going to do.
One final thought: If cash value life insurance is such a bad “investment,” why do banks view it as Tier 1 Capital and own billions upon billions of dollars in cash value?
While a good article, I would agree each individual consumer takes on a different case. I write my share of permanent insurance (more on the final expense), but I would agree that term insurance deserves its place in everyone’s portfolio.
I was hoping that someone would comment on Primerica, supposedly the best company for term life insurance that guarantees premiums for 20 years.
Life insurance is not like buying auto insurance. A cheaper price does not always yield a better product.
Price only becomes an issue in the absence of value.
Why would anyone want to chance life insurance on a website from a no name company? People have to understand what life insurance does and what each company risks by giving you and me insurance. Remember you are buying dollars with pennies…..who really wins??? If you buy a 20yr term policy at $500,000, will that company 19 years from now be around to pay that claim or even be able to service it???
What if you have questions? do you call up some 1800 number to get service or answer questions on it? What if you want to convert your term to a perm someday? What about additional riders, to protect children, or ability to buy more insurance, or purchase long term care. Did you know that some companies allow you to use some of your death benefit for a terminal illness even before you die? Would that 1800 tell you that….Some companies bundle life insurance with guarantee issue disability policies. Amazing
Why in the world would you ever chance your family, your children’s lively hood to some Internet website company that doesn’t know a single thing about you????
Also, most agents can shop around for you and do the grunt work. They don’t get paid until they sell the policy. So why not build a personal relationship and let them do the shopping for you. It’s a win win.
I urge you to speak with a local agent and do research other than just this one website.
I find it hard to take advice from someone that is not a professional, has no training, and no experience selling life insurance. It requires many licensees and certifications to be certified by the US gov’t to sell these products. No easy task. So beware of information coming from someone that just had an one experience. If an author completely denounces perm insurance then that only shows how inadequate their knowledge is of this industry….lol.
Would you trust a auto mechanic to do open-heart surgery?
By the way, I would stay away from Primerica, just read consumer reports. And look at the bankrupt company that owns them…. hmmmm
Almost all companies sell 10,15,20,30 term polices… Which have guaranteed premiums for the given amount of years. That’s way they call it 20yr guaranteed level term….
Whole life insurance aka “cash value life insurance” doesn’t make sense for the strapping young 20 something but might if you’ve got considerably more assets and want your policy to build cash value and never expire. Whole life insurance policies are designed to build cash value over your life time and are not designed to fill a temporary need.
I am an insurance agent and I am not writing this comment to promote any insurance company.
When I meet a client I am like a dry sponge who is ready to absorb all clients informations. I don’t have products or solutions to offer in my hand yet. I don’t expect to make a sale what I am hoping is to be able to explain clearly what possible solutions fit with their need and hoping they will understand it well. I don’t care what is the performance of the market yesterday or today because if it does not tell me how it will perform tomorrow or years to come it does not help my clients choice of term or whole life insurance.
These are some of my real life cases:
A 67 years old can’t be insured because of his health condition. This was after his 20 yr term insurance expired. Now that his family badly needs it the life insurance is not there anymore. My suggestion is check your life insurance contract and ask yourself, will it be there when you get old? Will the premium increase? Can I afford it at that time? Cheap does not mean anything if it is not right for you. And unfornately in life insurance there is no reset button that allows you to start all over again.
I have another case that her UL premium is increasing. She bought her universal life on her early 40s and now she is on her mid 60s. I notice on her contract there no more guarantees at her age now. We ended up providing a whole life insurance with dividend and cash value.
I can tell you more facts about life insurance. But in the end the question is, was he/she insured?
rWhen buying a life insurance review the illustration properly don’t be excited with the huge death benefit and small premium if you are in this scenario, statistically nothing is expected to happen to you sometime soon.
Mutualy owned insurance company gives dividend and cash value which accumulates more and faster after time. Study closely the illustration you will be surprise the benefits it can provide.
Choose company that has excellent ratings it will give you more guarantees that they are there for you and your family when you need them.
my question is with whole life insurance policy. I received a quote of $1500.00 a month for a $2,000,000 policy. I am 43 years old and if I understand correctly if I keep making these payments till i die or even ( 60 more years totaling 1,080,000 in payments at 1500 a month) they will give my beneficiary $2,000,000? Not bad right
Can anybody tell me anything about MetLife Term Insurance? I am 28 years old and according to their website my beneficiaries could get up to two million dollars with a premium of $66.00 a month.
What do the Consumer Reports say about MetLife????
The differences between term and whole (permanent) only compare to benefits with the persons that is buying what their situation is. For ex. one individual may look at term life insurance because at the time they are under a budget and want to be able to determine the rate and time period in which they will have to cover the cost. The other way is if someone is looking to invest into whole life insurance and as the time passes, their investment can gain in value. Like if you were holding any other investment the value of it is what you look to have a gain in….
Be sure to get more than one quote so you can take time to compare them and go through each one thoroughly.
Some complete assistance moving companies would raise the price on the day
of the shift and cause scuffles. They usually provide long distance
mover provides services to the customer who wants it from them.
There is an HCG approved shampoo out there for you.
At this very moment, 31% of Americans are obese with a BMI
in excess of 30. However, some women aren’t able to calculate their due
date and how far along they are in their pregnancies based on this method.
If 2 red lines are displayed in the strip, it tells that you are pregnant.
First of all, you are injecting something foreign into your body and messing
with your hormone levels. However, if you still aren’t certain HCG is for you and need more information, there
is wealth of online resources out there including many
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deliveries and birth defects. There are said to be quite a
few clinics in the United States that dispense the
HCG shots for weight loss but searching for one with reasonable
prices might be pretty time consuming. And canned vegetables too are processed and are not
nearly half as good as fresh vegetables.