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?
- Free Google Docs and Excel Personal Budget Planner Spreadsheets!
- How Much Life Insurance Should you Buy?
- Emergency Fund Guide