Term vs. Whole Life

Insurance

We’ve all been exposed to life insurance in some way. Some of us have heard about it through a movie, or an annoying commercial. Maybe you have a parent or relative that has been telling you for years to “get it while you’re young and healthy, the rates are cheap.” Others have lived firsthand with a death in the family and seen the financial impact having or not having a policy can have.

The reality is, we’re all going to pass away at some point (unless Elon Musk can promise to solve that *small* problem, too). In a perfect world, we would time our life insurance to be maximized when we meet our ultimate end, but life and death do not play by our rules. So how do you shape your life insurance strategy, instead of trying to play the mortality market?

There is no perfect answer, but I can try to shed some light on a strategy you may look at. First let us discuss the difference between term and whole life.

Term Life:

    • Rates are locked in for the duration of your term (10, 20, 30 years, etc.). After the duration, you get your renewal rate, which can be exponentially more expensive
    • Much cheaper. Your chances of dying within that term are low, and prices reflect that
    • Primarily used to cover debt, loss of income, or buy-sell arrangements for business owners

Whole Life:

    • Rates are guaranteed for life, so you won’t get slapped with a large renewal bill
    • Acts like an investment, meaning it has tangible value as you continue to fund it throughout the life of the policy (and even after you have stopped funding it)
    • Primarily used as an investment, estate planning tool and tax strategy

So which one is best for you? *The answer may be both.* The strategy I mentioned above had me set up a participating whole life policy for myself and my fiancé. This policy and death benefit will grow for years to come and has guaranteed rates. Looking at our mortgage and financial plan, however, the amount of death benefit would not be enough to ensure we keep the house and provide income should either of us die. Feeding two cats and a dog who act like they are always starving can start to add up when you go to a single income. We decided to layer some term life insurance on top. Once the term is up, we fall back on the whole life policy and can either let the term renew, apply for a new policy, or decide to only maintain the whole life plan.

This is our plan for now, but insurance has flexibility. Both term and whole life have their place in the world. If you’re an incorporated business owner or professional, there are some advanced strategies with life insurance to turbo-charge your financial plan.

If you want to chat further, I’ll be here. Thanks for listening.