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Why do financial experts say term life insurance is better than whole life? |
I've heard it from Suze Orman, I've read it in Personal Finance for Dummies, but why do these life insurance agents keep telling me that Cash Value is better at protection than Term? Life insurance agents can only make money off by selling one product, which is life insurance. If you sold a cash value life insurance, the average annual premium is about $2000. If you sold term insurance, the average annual premium is about $1000. Lets say your commission is 95%. Would you rather get paid $1900 by selling a cash value life insurance or $950 by selling term insurance? So there's a huge incentive for an agent to sell cash value life insurance. Its also huge profits for the life insurance company. In cash value life insurance, your premiums are paid for two things. One is the life insurance and the other is cash value. The problem is, you really don't know how much of your premiums is going into each part. Some people who own this type of life policy think they own the cash value. Well, if they ever wanted to take money out, they have to borrow it and pay a loan interest on it. I don't know about you, that doesn't sound like ownership to me. To add more insult, if the person dies, the life insurance company keeps the cash value for themselves. (If the person wants to include cash value with their death benefit, the person would have to pay lots of premiums for it.) With term insurance, it doesn't build cash value. So you have the flexibility of where you want to save your money and actually own it. You can put it into a bank account, invest more into your 401k, open an IRA, and so on. Since it doesn't build cash value, the premiums are much lower than cash value life insurance. Why is term better? You can get the right amount of protection needed for a low amount of premiums. In the future, you may not need life insurance or as much coverage because you have less financial responsibilities. If you invest $100/month and your portfolio gets an average 12% rate of return over a 20 year period, you can potentially have almost $100k. In 30 years, $353k. In 35 years, $650k. Is your investment going to do 12% every year? Of course not. Some years it may do only 8%, some years 18%. Whatever the case is, in the long run it may average out at 12%. There is no guarantee that you will get 12%, but if you look at the history of the stock market, have you ever seen it go down in the long term? Source(s): http://finance1o1.blogspot.com Its the same protection between the two as far as a basic death benefit goes, but you need to choose between these two based on your individual investment needs. Term is low cost and meant for purely a death benefit. Cash value or Universal life you can "overfund" and use that excess sort like a savings account that you can pull tax free income from in the future. Most UL's have a guaranteed rate of return and is tied to the growth of the S&P 500 (with a cap). Hope this helps. Your heirs DO get the death benefit PLUS the cash value without higher premiums TAX FREE. Find an independant financial planner who can show you in better detail. Agents make MUCH more money off whole life, than term. ~ It is, and always has been a major ripoff. You don't build up any equity until about the 3rd year. Term just gives protection, without trying to be a savings account at the same time. Financial experts know about that! Simple. They make more money! They get you to invest your money with them. They in turn invest your money and they keep a portion. So not only do they get they money for the insurance (which they make money on also) they get your money to use long term. "Cash value" policies have a terrible return compared to investing the difference in mutual funds. Part of the reason is that much of the difference is not invested at all. It pays the agents commission. In addition, if you die, your heirs only get the face value. The insurance company keeps the 'cash value'. If you buy term and invest the difference, your heirs keep the 'cash value'. As a sales person I'm sorry to say...... the commission structure for whole life is strongly more favorable than term. What's worse..... the commission structure for annuities is over the wall. 95% of the people that buy them would be better off with another product. |
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