Whole Or Term Life Insurance: Which Is A Better Buy?
UPDATED: April 21, 2009
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When it comes to purchasing life insurance, consumers generally have two choices – whole or term insurance. While each has different characteristics, what most consumers want to know is – which is a better buy?
Whole life vs. term insurance
Bob Scott, a California attorney and partner with the Advocate Law Group, explained the concepts of whole life and term insurance:
Whole life. Whole life insurance is a type of policy that allows you to build up a cash value. So, when you pay the premiums, some of that is siphoned off by the carrier. That’s called cost of insurance or COI. There is also a commission paid to the broker who wrote it. The broker will receive that year after year. Another part is paid for fees and insurance – essentially insurance taxes – paid to each state that they write the policy in. In your state, or wherever they wrote it, they would pay a small fee there to the insurance commissioner. The rest of it should theoretically go into a savings account for you.
Term. This type of insurance is purchased for a stated term. That could be for six months or a year – those kinds of time periods. You’ll usually pay a monthly fee and the two components of that are 1) the commission and whatever’s paid to the state insurance commissioner on a tax or premium tax, and 2) the cost of insurance and a little bit of profit for the company associated with it.
But, what consumers want to know is…
Which is a better buy?
Term insurance is usually a better buy, according to Scott, who says that:
If you’re shopping with your pocketbook, as most people are, term insurance is a good way to go. However, in today’s world, it’s important to look at your individual situation. So, you can say, “Well, if I’m 35, I’m only going to need life insurance for my kids until they’re working – so I would need a 20 year level term.” A level term just means that the amount paid per month is a guaranteed rate and it never goes up.
That being said, premiums for term insurance can increase over the years and as you get older, your risk increases. The National Association of Insurance Commissioner has adopted rules throughout the country because there’s usually no more than a two-year incontestable period. That means that from the time the policy is issued, the insurance company can come back and do a full analysis of all of your health issues to see if you were truthful on your insurance policy application.