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What are the pros and cons of term vs. whole life insurance?

Jan 05, 2012 by Brian from Philadelphia, PA in  |  Flag
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The best way I can describe the term insurance vs. permanent insurance is by using the example of your home. If you "rent" your home, this would be similar to a term policy. Typically, when you rent your home, you have a lease for a certain time period - 6 months, 1 year, 2 years, etc. At the end of this term, your landlord has the right to raise your rent. Well, term insurance is very similar. At the end of your "term" (10 years, 20 years, 30 years, etc), the insurance company has the ability to raise the cost of your insurance. During the "term" however, the price remains the same.

Whole Life Insurance is a permanent type of policy. A permanent policy is similar to owning your home. When you own your home, you typically pay more. However, you build equity in your home. A permanent policy is similar (there are many types that specialize in building "equity", guaranteed death benefit, etc).

The pro of term insurance is that it is cheaper. The con is that if you still need the insurance after your term is up - it can become really expensive.

The con of a whole life policy is that it is more expensive than a term policy. The pro is that you can design a policy so that the premium is guaranteed for the entire life of the policy and as long as you pay and the insurance company is around... your beneficiary will receive a death benefit. Every situation is different. However, if cash flow is tight, term insurance is typically the way to go if you are looking purely to protect your loved ones in case of your passing. With estate planning, we typically recommend a permanent policy. But every situation is different.

Melissa Levin, CFP®, CFS LPL Financial

Due to industry regulations, the advisor may not post additional reply comments. If you would like to contact the author, please email her at Melissa.Levin@lpl.com. Securities and Advisory services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. Guarantees are based on the claims paying ability of the issuing company.

Comment   |  Flag   |  Feb 07, 2012 from Cowan Heights, CA

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Term life insurance you are just paying for insurance and it is generally the most cost effective. However it only covers you for a finite period of time...the "term." Whole life costs more, will pay a small dividend and if funded correctly will cover you for your "whole life." It is more expensive than term but hopefully if designed correctly will be able to "self fund"

Here an a link from SmartMoney.com http://www.smartmoney.com/plan/insurance/term-or-whole-life-8011/

Comment   |  Flag   |  Jan 05, 2012 from Boston, MA

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Brian - As most of the other advisors have noted, term life insurance offers much better value than whole life. In twenty seven years I have never run across a case where whole life was a better option than term life. I would expand on this idea as follows:

(1) the price of term life insurance varies widely between carriers. It is definitely worth your time to shop around. There are a number of term life specialists who will do the work for you. Feel free to contact me and I would be happy to make a referral. If you are in a high risk group, you may want to consider group life insurance, which offers level pricing for an entire risk pool. Group life tends to be expensive for most but not all of the participants in the pool.

(2) Many term life contracts offer "guaranteed renewable" periods - 5, 10, 15, 20, 25, or even 30 years in some cases. This gives you a low cost option: the maximum price of coverage is locked in, but you can continue to search for better and more cost-effective coverage. Given that the cost of term life coverage has steadily declined over the past 20 years, this option is valuable compared to a permanent policy.

(3) One question you may have, which has not been addressed here, is how much coverage should you purchase. I advise my clients to maintain coverage equal to the present value of their future expenses at a minimum, or the present value of their future income at a maximum. This approach is sometimes referred to as "human capital hedging." All else equal, for someone who is early in their career with many dependents, the amount of coverage will be larger than for someone who is older with one dependent, and it will decline over time. A person with no dependents may not need any life insurance, unless it is to cover direct mortality expenses.

(4) Insurance is often used effectively to manage liquidity risk (for instance, with a private business partnership) and in estate planning. If you have such needs, be sure to work with a fee-only advisor to determine your needs and help source cost-effective coverage. Do not ask the barber if you need a haircut; an insurance agent is not the person to be giving you advice on how much coverage to buy.

I hope this information helps you with your decision making process.

Comment   |  Flag   |  Feb 07, 2012 from San Francisco, CA

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There are definitely " Pros and Cons". Like everything in life, its a matter of weighing them against your particular situation. Here is an orderly way to do that:

http://www.completeadvisors.com/2012/03/08/ignore-life-insurance-at-your-own-peril/

Comment   |  Flag   |  Jul 11, 2012 from Port Washington, NY

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David Kleinik Level 15

Brian,

There are no "Pros" to whole life insurance.....in THEORY it sounds great one vehicle that protects your family and you can eventually use the savings for retirement. But, it cost a lot more than term insurance if not double pretty close and THE ONLY PERSON IT BENEFITS IS THE INSURANCE AGENT.

Term insurance is great its cheap and you get the most bang for your buck it is the original form of life insurance. But, my firm teaches a concept called "buy term and invest the difference" meaning buy term insurance but have a game plan that at the end of the term 10, 15, 20, 30 years you are self insured (have enough saved that you do not need the insurance)

Hope This Helps, David Kleinik

1 Comment   |  Flag   |  Jan 31, 2012 from Jacksonville, FL
David Kleinik

Here are some Financial Advocates Opinions on Whole Life Insurance Dave Ramsey - http://www.daveramsey.com/article/the-truth-about-life-insurance/ Suzie Orman - http://www.youtube.com/watch?v=WzgtWfQngII

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Flag |  Feb 07, 2012 near Jacksonville, FL

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