Why would I pay more for less coverage in whole life insurance?

Question

when I can get the right amount of coverage I need for less money in term insurance?

Answer 1

Good question, I don't know why you would. Your premiums go to two different places with Whole Life and the variant cousins it has spawned- 1) Cost of Insurance and 2) Cash Account.

1) Cost of Insurance- One part of your premium covers the cost of insurance. Meaning, the actual part of the policy that pays the death benefit. Would it surprise you to know that the insurance companies use Term Insurance for this? Usually, annually renewable term- the most expensive kind of term. With ART the preium goes up every year. This is what they use in Universal, Variable Universal, Variable and EIUL policies. That is why, in the guaranteed column of these policies, you see that it earns money but by 20th year there is no cash value and no insurance.

2) Cash Value- This is the other place part of your premiums go to. This, however, is usually FAR worse than asavings account at a bank. Why do I say this? There are five main reasons why: A) In the first couple years, it earns little to know money. For investing purposes, the first several years are key. The more money that is gaining interest the more money there will be on the other side. B) When it does begin earning interest, it does so at 1-4% per year, after commissions and all the other fees have been taken into account. C) They tell you you can take a loan out against the policy. They don't tell you that if you pay it back you will be charged 6-8% interest or if you don't pay it back the amount of the loan not paid back will be taken from the death benefit as will interest. D) It could take up to 6 months to receive your money from the company. E) When you die, your family chooses between the death benefit OR cash value NOT both. If you pay more for premiums and want to have them receive both, it becomes more expensive.

Answer 2

This GREATLY dependent on your specific financial situation. Whole life has MANY benefits and so does term. You need to speak to at least 2 experts in the field. Tell each of them your goals for the coverage and also your entire financial picture.... The wealthier you are the more likely you NEED Whole life.... do not rush.... take your time and ask questions face to face. This is way too important a question to get a complete answer in this forum.  Also keep in mind there are many ways to collect on life insurance without dieing! Good luck!

Answer 3

Whole life eventually builds up a cash value that term insurance never does.  Ask an agent about this feature.  I would buy term and forget the whole life policy.

Answer 4

Depends on why you are buying Life insurance.

Term insurance:  Good for a temporary need.  Starts out cheap, but gets more expensive.  No cash value, no colateral value, eventually expires around age 80, so if you plan on living past 80, you likely won't have any insurance coverage with a term product.  Think of this like renting a house...it's a quick fix for the short term problem and when you don't need it anymore, you don't get any more back since you have no equity and eventually at some point, you're landlord (the insurance company) can kick you out (cancel your policy) and there's nothing you can do about it.  Term insurance is best to be bought if the need will go away within 20 years (IE: to cover a mortgage, get the kids through school, child care for the kids, etc)

Whole life is for costs/expenses that will never go away no matter how old you are.  These include, but not limited to Funeral expenses, legal and administrative fees, taxes, charity donations/legacy funds, and more.  Whole life is a little more expensive in the short term, but in the long term it is far cheaper.  It builds a cash value, so if you cancel it after a certain period you get something back (only about 2-4% of the total you put in, but at least it's something) and you can use that as colateral with a lender.  Also, if you are in Canada (not sure about other countries), a Life insurance policy is one of the only government recommended tax shelters...it's written right into the income tax act of Canada.  Whole Life insurance is like buying a house...you are paying into something and building equity in it, so when you stop using is (cancel or die) you get money back out of it for sure.  If the need will not go away within 20 years, whole life is what you need.

Answer 5

You should never buy less coverage simply because it is whole life vs. term life.  An agent who tries to make the point that whole life is so valuable your family doesn't need the same amount of coverage is open to a lawsuit.  In other words, the insurance tool you choose does not affect how much you have at risk.  Changing hammers doesn't change the nail.

So assuming that you would insure the same amount, it becomes a cost benefit analysis.  You should consider how long the risk might last and your time value of money.  For the majority of people, term makes the most sense, but one size does not fit all.

Answer 6

Well, what happens when your term is up? You assume your children will be grown and that your spouse can do fine on one income without insurance. But what if a surviving child or your spouse becomes disabled during the term? A disabled person might not be able to support himself or herself when you die. With a disabled adult child living at home, your spouse might not be able to meet all the expenses on his or her own. You may assume that you can buy a new term policy later in life, but insurability is not guaranteed. If you gain weight or develop a serious illness, you might not be able to afford the higher premiums, or you might not be insurable at all. Even in ideal health, you will pay much more for term life over the age of 50 than you would earlier, erasing some or all of the savings realized during the term of the first policy. Permanent life insurance—such as whole life or universal life—will not expire and the payments will not go up based on the health, weight, or age of the insured. Permanent life insurance costs more initially, but it is a practical solution for consumers who worry about coverage and insurability later in life.