Which is better Term or Whole life insurance? part three…

#3. Which is better Term or Whole life insurance?

This is like trying to say which is better an apple or an orange.   While both an apple and an orange is a fruit they are both very different.   Both an apple and an orange are good for you and are a healthy choice to make, but you will enjoy them for very different reasons.    Likewise, term and whole life insurance are both life insurance products that are very good for you for different reasons.   These policies are not right or wrong, they are simply an appropriate match for your needs or not a match for you at this time.

What is the Difference between Term and Whole Life?

This article is in three parts,

  1. The different purpose of Term verses Whole Life insurance.
  2. The different Tax strategies of a life insurance policy
  3. The investment options of a Term and a Whole life insurance policy

please check out all three blogs and then call Michael Spears at 403-831-7820 to set up your policy plan.


Step three: The investment options of a Term and a Whole Life Insurance policy

Discussing the differences of the investment options in an insurance policy is what clearly distinguishes the two types of policies.

What investment option is there in a Term Insurance policy?

Answer:  None.

Term insurance is straight forward financial protection for an agreed upon length of time.

There are no extra benefits. This is simple and you get exactly what you agreed on in the original contract.   If you are the type of person who wants a simple answer then this is good, however life is a bit more complicated.

A term insurance only option is not a perfect “one size fits all” plan for every one.  As you assess the goal of your benefit or payout for your family you need to keep in mind that the expenses that are being protected are effected by inflation and the needs may change over time.  Yet the benefit amount of the Term insurance policy will stay the same for the length of the contract.   Some companies offer the option to increase the benefit to match inflation, but be careful that also means that they will increase the payments if you choose this option.   If your personal cash flow is guaranteed to increase then this is good, but it is still temporary.

When someone is promoting the Term insurance only plan, they are assuming that your investment plan, your cash flow and your intention of a balanced budget are guaranteed and will never be a concern.    If we accept that life may have some surprises financially then you will accept that Life, Health and Critical incident insurance are appropriate and very relevant for you and for your family.

 

What investment option is there in a Participating Whole Life Insurance policy?

Answer: YES, simply the Insurance company pays dividends into your policy.

A whole life policy does not offer you the choice of what type of investment the company is working with, if that is your choice then you need to ask about a Universal Life insurance policy, and that would be a different blog…

However when you own a participating whole life insurance policy the insurance company is naturally investing the money they receive and they commit to pay back into your policy some of the annual dividends.   It is to your benefit that you have a choice as to how the dividend will be paid back to you and there are various benefits to this.

The whole life insurance policy offers financial advantages.

  • For the insured
    • Cash Value available as a withdrawal or a loan
    • Dividends option paid out as a cash payment
  • For the Beneficiary
    • Increase in benefit due to dividends buying paid up insurance
    • Increase in benefit due to dividends directly being added to the benefit.
  • For the policy owner
    • Has the choice to stop payments and just maintain the policy with the amount of paid up insurance.
    • Has the choice to miss a few payments and the cash value will be used to make the premium payments.

The value of these options will vary depending on the company that is offering the policy, the amount of the policy and the length of time the person is holding the policy for.   Therefore, it is always important to discuss the illustration with the agent fully when evaluating the policy.

For the purpose of this debate the answer is simple.

A term policy may offer a high value of protection at a low cost for a short time period.   While a whole life insurance policy offers a permanent protection at a cost relative to the length of expected coverage, it also offers many options to the insured, to the beneficiary and to the owner of the policy, depending on how you choose to set up the policy.

  • If you have a temporary need then you will buy a term policy.
  • If you have a permanent need then you want a permanent plan that gives you choices and flexibility.

A Whole life policy provides a tax sheltered investment option that is safe and secure.   

I do not promote the Whole Life insurance policy as an investment option, since it is not a liquid investment from the beginning, and the dividends are not guaranteed.   Yet it is the first level of your investment planning as a safe and secure inheritance to your kids.

I do promote the Whole Life insurance policy as the first part of an investment plan and an important part of financial planning.

Financial planning is not magic, it is simply planning ahead so that you are prepared for future expenses for your self, your spouse and children.

You may plan to have a very large sum of guaranteed cash available to pay for future expenses or you may plan to have a whole life insurance policy in place to pay for these future expenses.

 

Please call Michael Spears at 403-831-7820

to set up an appointment to arrange for your customized plan to secure your financial future.

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