5 Reasons to Choose Term Over Whole Life

The whole life insurance market size is a 175-billion-dollar industry. I have sat down with a lot of people with whole life insurance policies; however, I refuse to ever use one. Here are five reasons why I choose Term over Whole Life.

1. Less Expensive – Term life insurance is the cheapest all-encompassing life insurance. For the purposes of this article, we will use the average policy, which is a 40-year-old male purchasing a 20-year term policy with a face value of $500,000. This policy costs on average $28 a month. A whole life policy with the same $500,000 face value for a 40year old male cost around $586 a month, a difference of $6696 a year.
2. Cash Value – Whole life insurance has a cash value portion to it as well, something that term does not have. However, the entire premium does not go into that cash value, and that cash value accumulates on average between 1.5% - 3%. If the savings explained in reason one is used to invest in the S&P 500, which averages 10%, we will see a much greater return on our investment. Even if the whole premium goes into the cash value, and averages 3% over the next 20 years, we will see the cash value become about $188,952. The S&P 500 investment, with term life premiums would be $383,513.
3. Tax Treatment – Both policies have the same tax treatment when they payout. However, the cash value of a whole life policy, if managed properly, could provide tax-free income. If you just invested in a brokerage account with the S&P 500 you would not have that tax advantage. However, if you invest in a Roth IRA account instead of the brokerage account you would have that tax free treatment.
4. Policy for Life – A whole life insurance policy has the positive piece of a death benefit lasting until the insured passes away. It does not expire like a term policy does. However, as we have shown above, the cash value of the Roth IRA invested into the S&P 500 almost covers that $500,000 death benefit. One more caveat that I didn’t mention before, the whole life policy has premiums until age 65. So, if we use the parameters from number 2, and add 5 more years, the cash value in the whole life policy is $256,382, and the Roth IRA is $658,532. This is a difference of $402,150.
5. Retirement Years – The final piece of Term over Whole life, after you turn 65, and the premiums start to come out of the cash value, the cash value will stop growing. This is how the product is designed. The Roth IRA portion, however, will continue to increase, and can provide income while retirement tax free.

The math consistently checks out buying term, and investing the difference is a better route than purchasing a whole life policy. The biggest reason these policies are so popular is they are a great product to sell. As a life insurance broker, it would take me 21 of these term life insurance policies to get the same commission as one whole life policy. Whole life insurance is a great product for the companies and agents that sell them, but not for the consumer who purchases them. If you have a whole life policy you would like to get out of, set up a call here! As always, thanks for reading!