Updated: Oct 15, 2020
This article is a REPRINT/REPOST from Christopher P. Hill, RFC® - President at Wealth and Income Group, LLC. It is NOT my original writing. However, if *I* were to write on this topic, I couldn't do much better than this article!
I hope you enjoy it.
For decades, economists, financial advisors and insurance agents have studied, researched and offered a wide variety of ways to explain the differences between Term and Whole Life Insurance. Regardless of how you choose to review the key differences, client decisions almost always boil down to cash flow. Is it affordable and will it fit into their budget?
When you remove the real estate downturn and mortgage problems of recent years, owning a home has traditionally been a much better long-term decision versus renting. Simply put, there are very few individuals or families who would willingly choose to rent a home versus own a home — if — they could afford to own.
Not only does ownership carry a psychological and status gain, but there are also long-term financial and tax benefits that make home ownership the better strategy. It is not difficult to determine who is a more suitable candidate to rent a home versus consider ownership.
The simplest way to review the main differences between term coverage versus whole life insurance is using a four-step, side-by-side comparison. This is based on the assumption that the insured person is healthy and does not engage in hazardous work or personal activities. It’s perfectly ok to rent versus own after reviewing the four-step analogy to explain term versus whole life, the next question to be answered is: “If you/we hypothetically assume that I am going to make the annual payments for you, which one would you choose to own? Term or Whole Life Insurance?” Invariably clients would always choose Whole Life Insurance — if — you remove the affordability factor.
Lower Price — Like renting an apartment versus buying a home, Term Insurance is known for its lower price. It is an entry level product that is more affordable from a cash flow basis.
Price Increases — One of the major disadvantages of renting property is that landlords usually increase their rental prices over time. Likewise, whether someone owns a 10, 20, or 30-year term policy, at renewal time, the price goes up. And with some contracts the coverage is unavailable or can only be continued with a prohibitive premium.
Protection Ends — Another disadvantage of renting is that landlords reserve the right to terminate the lease under certain conditions. Term Insurance is designed to eventually become far more expensive and less affordable in your old age, when you may need it the most. In other words, term insurance is priced to expire before you do.
No Equity — A renter has no equity at the end of a lease. If they want to remain in the property, they must renegotiate a new lease with the landlord. At the end of a term policy, there is no cash value or equity. If you want to maintain coverage, you must reapply. Regardless of your health condition, the cost will increase significantly, simply because you are older.
Whole Life Insurance
Higher Price — Whole Life has a higher price tag. The following points explain the purpose and a value. One should expect to pay more to own a home versus renting, but keep in mind that price is only relevant in the absence of value.
Price Remains Level For Life — Just like owning a home via a 30 or 15-year mortgage, the price of Whole Life insurance remains the level for life. Most Whole Life policies also reach a point where the payments are no longer required, and yet the policy and cash value remain in force for life.
Protection Lasts a Lifetime — Just as the name implies, Whole Life insurance is priced to last as long as you do, providing coverage or “a roof over your head” (which usually increases in value) for you until death.
Builds Equity — As mentioned earlier, just like building equity in your home, the payments you make in a Whole Life policy create a cash value. This cash value accumulates on tax-deferred basis over time at a guaranteed interest rate or better. This cash value provides access and liquidity via withdrawals or loans. Yes, the price of Whole Life Insurance is higher but with significant benefits. Similar to owning a home the payments create a value over time, either via the equity in your home or a guaranteed lifetime “roof over your head” for your family. So over time the price is higher but the cost (or net effect on your wealth) is usually zero.
Bottom line: Term and Whole Life insurance are both excellent products. The reality is that Term insurance is a more affordable and suitable fit for many clients. It is the job of the financial consultant to properly educate and empower individuals, families, and business owners who can afford to own life insurance versus rent this all-important protection. In either case, the main objective for every financial professional should be to ensure the right amount of coverage versus selling the features and benefits of Whole Life Insurance.
President at Wealth and Income Group LLC Christopher P. Hill, RFC®, is the President of Wealth and Income Group LLC, with branch offices located in Tysons Corner, Chantilly, Roanoke, and Stephens City Virginia. Chris began his 25-year career in the financial services industry by spending his summers as a college intern for a major stock brokerage firm. Immediately after graduating college with a B.S. in Finance, Chris spent over a decade working closely with the Senior Portfolio Manager of a leading money management firm. In 2001, Chris decided to form his own company and continue assisting individuals, families, and business owners with their financial and retirement planning matters, with a primary focus on wealth management.
Now, in my opinion, cash value life insurance isn't a "needs" product. It's a "wants" product. One should want what it does for them, rather than doing a "needs" analysis to figure out how little you can "get away with" to meet your "needs".
That's where this 10-minute lesson on life insurance comes in. This helps to explain the differences and why someone should "want" to buy a cash value policy.