Life insurance: term or whole life? How about a middle road?

Life insurance is confusing and complicated, but it doesn’t have to be! Essentially there are two main types of life insurance: Term and Whole Life. What’s the difference?

Term Life Insurance:

  • strictly insurance
  • is only for a limited time (short term: ranges from 10-30 years)
  • cheaper premium

Whole Life Insurance:

  • insurance that promises profit that can be used to cover your premium and even add to the value of your death benefit
  • lasts your entire life
  • more expensive premium

Here are the cons for each:

Term Life Insurance:

  • is short term
  • there is no investment (the value does not grow over time)

Whole Life Insurance:

  • is expensive (will be able to afford less death benefits)
  • has no guarantee that the promised profit will grow
  • even if there are profits, it will be low as the insurance company will be charging fees

For term you are essentially just buying insurance, all the money that you have to pay monthly (or yearly) for this plan will be gone, but for whole life the money you pay is used to invest in mutual funds that hopefully will profit and be able to cover the monthly premium so you won’t have to pay after 10 years (or so they say). But with the recent stock market volatility, there is no guarantee that the fund will make any money at all which means you’ll be stuck with the high monthly premiums until you are 65 years old and only then does the insurance allow you the stop paying. However, if the investments do well you won’t have to worry about the premiums and if the investments goes really well, the profits will be added to your death benefit and the amount that you leave your family will be even greater. Some whole life insurance plans even let you borrow money from the plan.

Okay now that you have a better idea, which one should you get? The questions you have to ask yourself are:

  • Why am I buying life insurance? Is this for an investment or is this for a peace of mind or both?
  • How much death benefit will my beneficiaries need? Who am I covering? Is there debts (such as a mortgage) that need to be taken care of? Will my beneficiaries be able to survive financially without my income?
  • Can I currently afford to pay the monthly premiums? What about in 5 years? What about in 10? 20? 30? 40? How much will my income versus family expenses be like at that time?
  • If my beneficiaries are my parents, how old will they be in 30 years? If my beneficiary is my spouse, how old will he/she be in 30 years? How old will my children be? How old will my eldest be? How old will my youngest be?
  • Will my spouse be able to take care of our children by him/herself if I die anytime between now and in 30 years?
  • What if both my spouse and myself die? Who will take care of my children? If it is my parents will they have income during now and 30 years?

I know these are hard questions but once they are answered, whether a term or whole life insurance is appropriate for you will be clear. For me, I wanted a term life insurance so that I can get a higher benefit value so that my parents can survive financially. If I die in a month, the mortgage can be paid off and the rest can be used to pay for their lifestyle until they grow of old age since I am an only child and cannot depend on any other sibling for their finances. For me, life insurance is just that – insurance. I do not expect to use that money for investments. In 30 years, my parents won’t have that many years left anyway so they should do fine with whatever savings that I have left to them upon my death so the fact that the insurance is short term does not bother me. I also assume that if I am married and have kids by then, my husband will be working and will not be too financially burdened without my income and also by then my children won’t be too young for me to worry. Besides, I plan to save money to take care of my family so I don’t plan on depending on my life insurance after 30 years.

Now what about the middle road? There is a type of term life insurance that is called “Return of Premium” or (ROP). What this means is that the money you pay for the monthly premiums are returned to you at the end of the term. So if you purchase a 30 year return of premium term insurance, all the money you used to pay for the premiums are refunded back to you after 30 years. Essentially, in 30 years you did not pay anything for that insurance. The only cost to you is the lost of inflation and the lost of earning potential that money would have given you but to me that is a fair price to pay to protect my family from a financial crisis that they would have faced if something happens to me.

Now that you know which insurance type to buy, how much would the premiums cost and where to buy it from? The premium costs depends on your health and whether you use tobacco. A good comparison site to find the best price across multiple plans and companies is www.wholesaleinsurance.net. The price quote they gave me was exactly what I ended up paying. You can also buy the insurance directly from them. I purchased mine from my local bank which you can do as well.

Insurance Purchase Process

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