Term Vs. Whole Life Insurance
Life Insurance Explained
Insurance is one of those things in life, that’s pretty much necessary because Well, life happens,
what is term life insurance, okay, term life insurance provides coverage typically for a set period of time. And most people go with 20 to 30 years on this, okay, you can go less, you can go more, it all depends on what you want and what suits your needs. So if you or your spouse passes away during this time, here, you are then paid the benefit of whatever the policy is. So if the policy is worth, let’s call it $500,000, you croak within these 20 to 30 years of whenever the policy is the your beneficiaries, it’s usually your spouse or your children or whoever you sign as the beneficiaries will get this payout period. So the nice thing about Term Life insurance is that it’s very affordable. Okay, it’s actually much more affordable than whole life. So typically, this works out to be for every $7 in term life insurance for let’s call it a 20 year coverage period, you’re probably going to be paying closer to $100 in whole life insurance for a 20 year period. Okay, that’s just how the premiums shake out. And I’ll get into that more in depth later. So term life insurance has no cash value. Okay, so you’re not paying into any premiums, you’re not investing any money. So as mentioned before, let’s use that $500,000 as an example. You pay a set amount per month, let’s just call it I don’t know, 20 bucks for that. It’s probably gonna be a little bit more, but you pay 2030 bucks per month, you get this amount of coverage, whatever that coverage is. And that’s it. You’re not building anything. You’re not investing that money. If you’re not making any interest on that money, think of it like car insurance, you’re just paying a set amount per month, so you get a certain amount of coverage. Okay? So this is actually not worth anything until you actually need it. Okay. But that’s actually the whole point of insurance. So that’s not necessarily a bad thing. So the pros that come with Term Life insurance is that it’s a great choice for people that are looking to how do I say this replace their income. So let’s say income replacement. Okay. So if you’re someone who has a family of four, and you’re making 50 grand a year, you should typically have something that covers about 10 to 12 times your annual salary. So in the event of your death, your spouse or whoever your beneficiary is, can take that lump sum invested in the market and hopefully live off the interest that would have been paid to you as your salary. Okay. So this is also good for debt payoff. And what I mean by that is that the premiums are much lower than whole life insurance. So you can actually use this to put down towards debt and pay off your debts and get out of debt. Okay. And then finally, this doesn’t apply to most people watching this video. But business policies, term life insurance is great. So if you have like a key person that’s within an organization, and they pass away, the organization, or whoever the beneficiary is, will realize that insurance policy. So let’s talk about the cons of Term life insurance. So this is one of the biggest ones, it’s costly to renew. The reason for that is if you use the example of the 30 year old, that gets a 30 year policy, and he still needs it, say like he’s still in debt, or whatever his finances aren’t in order, and he still needs to work. If he goes to renew this policy at 60 years old, it’s obviously going to be a lot more expensive than when he was 30. When you’re 30, you have a lot more life to live, you’re generally healthier, there’s less health risks, when you get older, obviously have less time to live, meaning the policy has a higher chance of being paid out, which means that the numbers have to work for the insurance company. So that was the cons of Term life insurance, let’s get into whole life insurance. So what is whole life insurance? So whole life has three components that we need to talk about. And this is what differentiates it from term. The first one are the premiums that you pay. So there’s both premiums, obviously, in the term that was the $7 versus the 100. So there has to be a reason why the whole is so much more. Why is it 100. So the premiums are the first component, the second is the death benefit. Okay, this is just what it sounds like, this is the amount that you’re paid upon your death, let’s just call it 500 grand for easy numbers. And then finally, this is the kicker, this is what differentiates whole versus term. And that’s the cash value. And I’ll put $1 Sign here. So the cash value is pretty much what gets accumulated and what the salespeople the sales agents, or the insurance agents try and sell you on. It’s kind of like the savings component or the investment component of a whole life cash value policy. Okay. So when you pay your premium, the money that you pay, remember this 700 bucks a month, obviously, a big part of that is going towards actually funding the death benefit for like the first five to 10 years, okay? Also where these premiums are going in the beginning, they’re not going towards your cash value, which you’re led to believe a very small amount is going towards the cash value, majority of these premiums are going towards the Commission’s of the salesperson. So that’s why they always try and push hold versus term. They’re also going to the administrative fees of actually running the policy. And they’re also going like I said, to actually fuel or fund the death benefit. Okay. So you’re led to believe that, oh, if you have a cash value, whole life insurance policy, you’re going to make 10 11% in the market, it’s going to grow and it’s going to be tax deferred, and that’s going to be your money, right? Well, actually, that’s incorrect. After all the fees and all that stuff is said and done. You’re typically averaging 1.5% on a whole life policy. Okay, let me repeat that 1.5% to 2.2%, after you’ve paid into this death benefit for like five to 10 years, that cash value starts to build more and more based off the premiums that you’re funding it with. Okay? So beneficiaries, here’s the big kicker, beneficiaries are only entitled to the death benefit when you pass away, okay? When you pass away the cash value that you’ve built up this whole time, that’s the whole thing that you’ve been being sold on this whole time goes away, okay, this gets absorbed by the life insurance company, believe it or not, this does not go to your beneficiaries, okay. So if you have a $500,000 policy that goes to your beneficiaries, okay? The cash value does not That goes back to the insurance company. So all this money that you saved, there’s this $93 difference between the seven and the 100. That $93 difference that you’ve been saving month after month after month after month, it does not go to your beneficiaries, it goes back to whoever your provider is, okay? The other thing is, with whole life insurance, you have no choice in how the life insurance company applies the premium. Okay, so when we talked about the premium for the first 510 years, going towards a majority of the death benefit, the Commission’s and the fees, you can’t choose what percentage of that goes to the cash value. It’s basically whatever their policy says, and whatever those underwriters and analysts have decided. So the thing is, you can actually, the only way to get this money right here, the cash value is to cancel the policy and surrender your policy. So you lose the death benefit, and then they’ll cut you a check for whatever that cash value was. So you’re losing your insurance, that’s the whole point of getting insurance, just to get your money back that grew at a very poor rate, that 1.5 to 2.2%. So it sounds like I’ve been talking a lot of smack about the whole life policy, there are a couple different benefits here. That cash value portion is non taxable, as long as it doesn’t exceed the total premiums that you paid. Okay? So if you paid, let’s just call it 100 grand in premiums, as long as this cash value isn’t above 100 grand, it’s not taxable. Anything above that 100 grand is taxable. Okay, so very quickly, let’s just go over a quick recap of the pros of the whole life insurance. And then we’ll do a quick recap of the cons. And then I’ll get into $1 comparison, if you will. So, the pros of the whole life insurance is that you have coverage for life, it’s not set to that 2030 years, like we talked about in the term policy, okay, this is covered until the day you die, right? You can do that, because again, your family members aren’t getting that cash value when you pass away, that goes back to the insurance company. So the other thing is, is that the premiums are guaranteed, and also the cash value is non taxable. And you can actually borrow against that cash value if you want to. So we talked about the non taxable unless it exceeds that amount, borrowing against it. So I’ve actually watched Dave Ramsey talk about this years ago, it’s kind of funny. borrowing against your cash value policy is like going to a payday lender of the middle class. So if your cash value policy is like, let’s call it 50 grand, if you borrow against that, to take out money, you have to pay a percentage on the money, you’re basically going to a loan shark, okay, you’re paying a percentage on your own money. Does that make sense you’ve saved and saved and saved and contributed that fat premium every month. Now, if you want to take out money against this, you have to pay a percentage to borrow your own money. Does that make sense? So let’s get into some of the cons of the whole life insurance. Some of the cons are that it’s obviously very expensive. Okay, so if this was a restaurant, I’d give it for dollar signs. Next is that it’s very inflexible. Again, we talked about those premiums, not being able to choose where they go. Again, it’s covering commissions, fees, all that stuff. I just typed in, I just wrote previous premiums. Next is the cash value accumulation is slow. Remember the first five to 10 years, it’s going towards the death benefit, it’s not going towards the cash value. And then finally, the big kicker that I’ve mentioned a couple times now is that the cash does not go to your family. So draw a little family here, it goes back, it’s absorbed back by the insurance company. Okay. So the whole thing with life insurance is that it’s expensive. And it’s probably one of the worst financial products out there, in my humble opinion. Okay, because it’s not doing what it’s supposed to do. It’s not supposed to be an investment product, it’s supposed to be an insurance product. You don’t go to your car insurance and say, hey, I’ll pay you more premium. If you get me back 1.5% over 2030 4050 years, that would be stupid. So let’s move on to a cost comparison example here very quickly. So say we have a 31 year old guy that has $100 a month budget to spend on insurance, okay, so he can get 125 grand in term, he can get 125 grand and whole, this one is going to cost them seven bucks a month. This was gonna cost them $100 A month, if you just did a simple investment calculation. Okay, let’s just say we’re getting 8% in the market over 20 years, because that’s what this term policy is going to be for. You’re going to end up with two completely different numbers. This $93 The difference between the 100 and the seven. Okay, so $93 at 8% over 20 years, would get you I believe it’s $52,917 and The market over 20 years. This if you want to invest that like one and a half percent, which is what whole policies typically return one and a half to 2.2%, after fees, commissions, you know, inflation, all that stuff, you’re going to end up with typically $25,983. Okay, so that’s a big difference. That’s basically a $28,000 difference. So with all that being said, I hope that this was just a good primer. There’s obviously different policies, different companies, different coverage amounts, all that stuff that needs to be taken into consideration. I’m not talking about health age, things like that. I just want to give you the big open facts about the difference between whole life insurance and term life insurance.