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Term is the clear winnerJul 13 '01 Write an essay on this topic.The Bottom Line Term is far cheaper, and that's the bottom line. I think we all understand the basic differences between these policy types. Term is a set amount of coverage for a set amount of time (usually 10 to 20 years). Whole life is coverage under a single policy until the age 100 or death. Variable is akin to whole life in that both rack up "cash values," but different in how it does so. Basically, variable policies offer alternative investment packages that under normal circumstances build a greater amount of cash value. There is one important thing to remember about the cash value policies. The "cash" belongs to the insurance company; not you. Its basically an amount of money set aside to pay for the greater insurance costs in your older years. With traditional whole life policies, the cash value will increase for a while, but then start to decrease as you enter those golden years. In simplist terms, you have stored significant savings with the company, in the company's name, to offset what otherwise would be unbearable insurance costs. If you die, your beneficiary gets the face value of the policy. The company keeps the cash associated with this cash value. This is the company's money. That can't be over emphasized, though it is frequently under emphasized by those who sell these products. In fact, misrepresenting the nature of this cash value is the single leading reason for disciplinary action by state regulators against life insurance salespeople. The cash value also is a line of credit for you. You can borrow against it (which should be a quick tipoff that the money isn't yours - you can withdraw your money, but generally you borrow things you don't own). The basic mathematical truth is that term insurance in conjunction with savings/investments will almost always be better than cash value life insurance. Whole life and variable policies are enormously expensive for the most part. This is why the face value of these policies is typically so much smaller than a term policy. Think of it this way, a term seller isn't likely to suggest a $10,000 policy. What can your family do with $10,000? Maybe pay for your funeral, but that's about it. Yet many whole life policies are sold with $10,000 to $25,000 face values. For many people, it would be difficult to afford a larger policy, unless they bought term products. The best approach is to buy a term policy for an amount that truly fits your personal needs. For many, this means an amount that will replace your income for a certain number of years. Oftentimes, people have a greater need for insurance than they realize. Again, salespeople are to blame. They get a higher commission for the cash value policies, so many are reluctant to advise you how much coverage you need. It would push you into the term market. For many, it is as simple to figure out as follows - figure out how much you are likely to make in income between today and when your kids will graduate from college. Then cover yourself for that amount, plus the $10,000 or so for final expenses. Obviously, this amount runs into six and even seven figures for most people. The term strategy involves covering your needs while you are young, when you have a lot of family responsibilities but not a lot of assets. Take the money you save (say the difference between a cheap term policy and an expensive cash value policy) and invest that in mainstream vehicles (like well diversified mutual funds). As you grow older, your responsibilities will decrease, particularly as your kids strike out on their own. Also, as you grow, your assets will increase. The combination of the two precludes the need for insurance in your older years. There are only two exceptions to the term-only rule that I know of. If you have a whole life or variable policy, and you since have developed a medical condition that makes you uninsurable, by all means you may need to keep that original policy. The second is if you know, beyond any doubt, that you are psychologically incapable of saving money. If you know that you will fail in your remaining years, however many they may be, that you cannot build assets to match or exceed the low face values of the cash value products you can afford, then perhaps whole life or variable life is for you.  |
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