Term vs. Whole Life Insurance: Whats the Difference? – Ramsey

If someone in your life depends on your income, you need life insurance. but not just any old life insurance: the right life insurance. let’s talk term life versus whole life.

Life insurance may not be a fun topic, but it’s important! your two main options are term life and whole life. but which is better the first is a safe plan to protect your family; the second is a scam. We’ll walk you through the differences between term life insurance and whole life insurance so you can see what we mean.

Reading: Whole life vs term insurance which is better

what is the difference between term life insurance and whole life?

We’ll tell you straight: term life insurance works, while whole life fails. The reason is simple: the true purpose of life insurance is to replace your income if you die, and to do so as cheaply as possible. and that is exactly what term life does. but all life? it’s expensive and confusing because it puts investment in the mix with insurance. adds up to an expensive mess, which we’ll discuss in detail below.

For now, this is the basic difference. Term life insurance has a fixed premium that remains the same throughout the life of the policy and only lasts for a defined number of years. whole life premiums can vary (a lot), last your whole life even after you’ve passed the age you’d need a death benefit for dependents, and are overly complicated by poor investment choices.

Frankly, a life insurance policy is not a plan to make money. is there to provide peace of mind for your family should the unthinkable happen. period. And that’s exactly how term life insurance works: it’s simple, affordable, and reliable. think of term life as the family bulldog: you hope you never need him to do his thing, but you’re so happy to have him in the house.

Of course, we know you’re probably interested in building wealth and protecting your family along the way. And those are legitimate targets! but each requires its own tool for the job, and you’ll get better results with both if you keep them separate.

Conclusion: Don’t mix insurance with investments. it has much better ways to invest than you’ll find in an insurance plan. what you find more fun: investing in growth stock mutual funds so you can enjoy your retirement or “investing” in a plan that is based on if you kick the bucket. easy answer!

Now let’s take a closer look at term life insurance vs. whole life insurance.

what is term life insurance?

Term life insurance provides you with life insurance coverage for a specified period of time. (hence the term term). if you get a 20-year policy, you’re covered for that 20-year period.

If you die at any time during those 20 years, your beneficiaries (the people you elected to receive your policy’s death benefit) receive a life insurance payment. For example, if you purchased a $300,000 20-year term policy and you die within the next 20 years, your beneficiaries would receive $300,000. yes, it really is that simple.

And here’s the key difference between whole life and term life: Term life plans are much more affordable than whole life insurance. This is because the term life policy has no cash value unless you die during the term (we’ll talk more about that in the whole life section).

But that doesn’t mean term life is a waste! After all, he wouldn’t skip homeowners insurance just because he’s never personally known anyone who’s lost their home in a fire. you’re willing to pay a small price for coverage to protect yourself from the unthinkable (but entirely possible) event. term life is the same. you want it because life is precious, hard things happen, and you care about your family. And despite what you’ll hear from whole life salespeople, life insurance has only one job: to replace an income. (that’s a big reason we like it).

pros and cons of term life insurance

Term life insurance marketers sometimes hate term life insurance because term life insurance doesn’t allow you to build cash value. they’re wrong, of course, but we understand why cash value can seem like a smart idea. Just to further explain why we recommend all-day term life insurance, here’s a rundown of the pros and cons.

advantages

cons

It is much more affordable than a lifetime.

You’ll hear some criticism about the lack of investment options, but this isn’t so much a scam as it is a way to muddy the waters and sell your entire life.

See also: National Insurance rates and categories: Contribution rates – GOV.UK

gives you the option to invest however you prefer (instead of locking up your cash in a very low-yielding investment).

allows you to advance to becoming self-insured (more on this below).

remember that all work life insurance does is replace the policyholder’s income. From virtually any angle, term life insurance does that job better than whole life insurance.

Of course, no one wants to use your term life insurance policy, but if something does happen, at least you know your family will be taken care of. they’ll still miss you, but they won’t miss you and wonder how they’re going to pay the bills.

what is whole life insurance?

Whole life insurance (sometimes called cash value insurance) is a type of coverage that, you guessed it, lasts your entire life. Whole life plans are generally much more expensive than term life plans. there are a couple of reasons for that, but mostly because you’re not just paying for insurance here.

Whole life insurance costs more because it’s designed to build cash value, which means it’s intended to function as both an investment account and life insurance. combine insurance and a savings account in one product? that makes no sense! It’s like training your house cat to be a guard dog: he may learn to scratch some intruders, but he will never actually protect your property and will be a miserable pet.

Here’s another truth about the difference between permanent life insurance and term life insurance. If you follow Ramsey’s 7 Baby Steps, you won’t need life insurance forever. ultimately, you will be self-insured. why? because she will have zero debt, a full emergency fund, and a lot of money in her investments. Hallelujah!

pros and cons of a lifetime

We don’t have many positive things to say about permanent life insurance. And for very good reasons! it’s one of the worst financial products on the market, it’s confusing, and it’s a budget buster to begin with. but we will add this box to clarify the issues.

cons

advantages

is much more expensive than term life insurance.

the only one we have discovered: all life is better than no life insurance!

tries to do two financial jobs (insurance and investing) at the same time, but ends up doing neither well.

could looking for good things of a lifetime become a new hobby?

delays or prevents you from becoming self-insured.

trying to think of the benefits of a lifetime might help you develop patience. . .

You (and your family) stand to lose a ton of your cash value if you die without collecting it.

. . . still waiting . . .

See also: What Is Supplemental Life Insurance? Some Jobs Offer It for Free

The moral of the story is this: keep your insurance and your investments separate. You don’t want to spend years investing your hard-earned money only to leave it all to your insurance company. be smart. get term life insurance.

Cost Comparison: Term vs. Whole Life Insurance

Let’s say we have a friend named Greg who is 30 years old and wants to get $250,000 of life insurance for his family. He meets with a whole life insurance agent who offers a $260 per month policy that will include insurance coverage and build retirement savings (which is what a cash value policy is supposed to do).

On the other hand, a term life agent tells Greg that he can get a 20-year term with $250,000 of coverage for about $13 a month, which is a difference of $247 compared to life insurance. complete.

If Greg opts for the lifetime cash value option, he will pay a hefty monthly insurance premium. but that’s because the part of your premium that doesn’t insure you goes toward your cash value “investment,” right? well, you would think, but then comes the fees and expenses. . .

Actually, the extra $247 per month disappears in fees and expenses for the first three years. after that, the cash value portion will offer an awfully low rate of return on your investments (we’re talking 1-3% here!).

but here’s the worst part. Let’s say Greg gets this $250,000 whole life policy at age 30. he pays $260 a month, $15 goes to insurance, and the rest goes into that savings account with a 2% return rate. After 40 years of overpaying for his insurance, Greg is 70 years old and has $250,000 in insurance and approximately $180,000 in cash value. So, Greg dies. How much does the insurance company pay his wife and children? $250,000. but wait! What happened to Greg’s $180,000 of hard-earned savings? the insurance company keeps it. sound like a scam? that’s because it is!

whole vs term life insurance

You see, only Greg was entitled to the money in that savings account. so, to keep it out of the insurance company’s pockets, he would have had to withdraw it and spend it while he was still alive. speaking of pressure! Unfortunately, Greg died before he had a chance to live it. now greg is rolling over in his grave and his insurance agent is staying at a five star resort on greg’s money.

But what if Greg chooses the $13-20 term life insurance policy and decides to invest the $247 per month he’ll save by not choosing the whole life plan? If you invest in good-growth stock mutual funds with an average annual rate of return of 11%, you’d have about $214,000 in investments by the time your 20-year term life policy expires and more than $2.1 million at age 70. that’s a lot more for your money! We think Greg will rest a lot easier knowing his family will be staying at this five-star resort.

don’t wait until you need life insurance to get it

Look, it’s not easy to think about this death thing. but life is precious! we cannot see the future and we are not promised tomorrow. the cost of not having a plan for the unthinkable is much higher than the cost of term life insurance. you need to keep your loved ones protected.

The ideal time to buy life insurance is when you are young and in good health, especially since life insurance companies look at the risks of the person buying the policy when they underwrite it. If you’re on the market for new life insurance or want to talk to an expert, we recommend Ramsey’s Trusted Associate Zander Insurance. Don’t let another day go by without being protected. start here to get your term life insurance quotes.

FAQs about term vs. whole life insurance

Is term life better than whole life?

yes, term life insurance is much better than whole life insurance. We don’t want to get ripped off, we want to see your family well protected, and of course we want your financial future to include wealth and the ability to become self-insured. The only type of policy that allows you to achieve all of those goals is term life insurance. but all life fails in all respects.

How much life insurance do I need?

that’s easy. you need policy coverage equal to 10 or 12 times your annual income. Let’s say you’re earning $50,000 a year. you need at least $500,000 in coverage. that replaces your salary for your family if something happens to you. you can run the numbers with our term life calculator. quick note: don’t forget to get term life insurance for both spouses, even if one of you stays home with the kids. why? because if the stay at home parent was gone, replacing that childcare and home maintenance would be expensive! If you want to make sure your family is covered, take our 5-minute coverage check.

How long do I need term life insurance for?

We recommend a policy with a term that will cover you until your children go to college and live on their own. that is between 15 and 20 years, depending on the age of your children. why so long? well, a lot of life can pass in 20 years.

Let’s say you get term life insurance at age 30, when you and your spouse have an adorable 2-year-old. he’s laser-focused on paying off all his debts (including the house), but he has one eye on planning for retirement in the future. Fast forward 20 years – they are both in their 50s and that little little boy is now a college graduate. the years passed quickly.

but look where you are! he’s debt-free, and with his 401(k), savings, and mutual funds, he has a cool net worth of $500,000 to $1.5 million! By working the plan, you built your net worth and your peace of mind. Now, if the unthinkable were to happen, even without life insurance, the surviving spouse could live on his or her savings and investments. Congratulations, you have become a self-insured! your need for life insurance is now reduced or gone.

what happens to term life insurance at the end of the term?

It’s nothing sensational. the policy will simply lapse, but you won’t notice it. you’ll already be in the money.

what information do I need to obtain a life insurance policy?

Applying for life insurance will mean providing some personal information, so let’s look at some of the things you’ll need to answer as you search for coverage.

See also: How much does long term care insurance cost on average

  • do you already have any existing life insurance?
  • How is your general health?
  • any medical history of serious illness?
  • What is your household income?
  • how much are your monthly expenses?
  • How much debt do you have, including mortgage?
  • What plans have you made for retirement?
  • What are your plans to cover college for your children?
  • Have you thought about how you want to pay for the funeral expenses?
  • what is your strategy regarding estate planning and taxes?
  • do you have a will and include plans for a trust?
  • what is your age?
  • the ages of your children?