When you’re young and have a family, term life insurance provides a big death benefit for a bargain price. But, the 30-year term protection ends and term life starts becoming prohibitively expensive because of the insured’s age and declining health, and the increasing probability of death.
Term life is a better deal for most families. The confusion starts with the fact that whole life insurance combines two financial products—life insurance and an investment—into one that is supposed to serve your needs over your entire lifetime. But life is unpredictable, and the circumstances that drove your initial purchase can be very different a decade later. A period of financial stress, say, may prompt you to eliminate the high annual payment and surrender the policy for its cash value.
A traditional whole life insurance policy purchased at 40, keeps the death benefit in force beyond age 70, as long as premiums are paid. Whole life premiums are steep...approximately $6,760 per year vs. $660 annually for the term policy. But the “excess premium” goes to guaranteed savings, which build cash value over time. So one value of whole life is the continuing death benefit for your heirs while you continue to build cash value.
Timing is Everything The name of the game is to hold on to your policy until you die. That means the value of a whole life policy depends on how long you own it. Here's what to look for:
Holding Whole Life for Less than Five Years
If a reversal of fortune causes you to quit the policy in less than five years, whole life is a lousy investment. Huge front-end sales commissions and policy-surrender charges eat up the cash value, and you’ll probably lose all or most of your investment. You will have received the value of the life insurance protection for that period, but that will be wildly overpriced because you could have paid significantly less for a simple term policy. If you worry that you won’t be able to maintain those high whole life premium payments for even a few years, buy term insurance instead.
Holding Whole Life for Sixteen Years
If you dump your policy around the 16th year, your cash surrender value plus the value of the insurance you received will be about what you put in. So that’s the earliest you can drop the policy without losing your shirt. If you’re wealthy, you can probably gamble on whole life over that long period. If you’re struggling, go with term.
Holding Whole Life for Two Decades and Beyond
If you steadily maintain your payments for two decades, the returns on whole life, including dividends, can compete with alternative investments of comparable risk. If you’re building a legacy for your heirs and have the money to keep going, the rising return trajectory and insurance coverage should give PEACE OF MIND.