First and foremost, term life insurance is a great product; it’s cheap, and it’s better than having no life insurance at all. Term life insurance predates Whole Life Insurance; in fact, the only reason whole life insurance exists is because of the areas where term life insurance comes up short.
The problem with Term Life Insurance is that the older a person gets, the more expensive the TERM life insurance gets. The insurance business is indeed a business, and if insurance companies had to pay back their customers the money their customers sent to them, then the entire insurance industry would be WAY more expensive than it is today.
The reason why the upfront costs of term insurance are far cheaper than whole life insurance is because there’s an above 95% chance that the customer will outlive their term life insurance policy.
On the flip side to this is Whole Life insurance, as long as you pay your premiums there is a 100% chance the insurance company will have to send you or your beneficiaries a cheque for the contractual agreed upon WHOLE LIFE insurance amount.
If you’re wondering, this is why whole life insurance is more expensive than term insurance. Term insurance is rented life insurance for a period, so the price fluctuates and gets more expensive as you age.
In contrast, whole life insurance is one fixed annual amount for the rest of your life, and it’s a guarantee that you or your beneficiary will get back more money than you sent the insurance company.
There shouldn’t be a Whole Life Insurance vs. Term Life Insurance debate because, for example, my personal whole life insurance has a term insurance rider attached to it. The two should always be considered important.
One of the reasons people try to create division in the insurance industry is because some people believe that people should buy term insurance and invest the difference in mutual funds for example.
As an insurance agent, my position is that it would be smarter to buy whole life insurance and invest segregated funds instead of mutual funds. The counterargument to investing in segregated funds is that mutual funds have cheaper management fees.
While this is often true, segregated funds are INSURANCE products so segregated funds(SegFund) will protect a minimum of 75% of your investment. So if I invest $100 into a SegFund the most I can lose is $25. Whereas if I invest $100 into a mutual fund I can lose the entire $100.
If I purchase a whole life insurance policy, the insurance company is contractually obligated to pay me the money promised as long as I pay my premiums until I die, whereas, with a term life insurance policy, the insurance company can opt NOT to renew my term insurance contract if they deem I’m too risky or too old.
You get what you pay for, so yes, buying term and investing the difference in mutual funds is a good idea; it’s the cheaper idea, but it comes with risks and headaches you won’t have when you purchase the whole life insurance contract I recommend along with investing in Seg Funds, which are similar to mutual funds but will protect at least 75% of the money you invest.
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