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Term insurance is the purest form of life insurance. It's focus is on you paying a premium in return for protection - nothing more. The most basic form of term insurance is ART - Annually Renewable Term. It has a premium that goes up annually.
Unlike fire or car insurance, life insurance (mortality) costs increase with age. The reason is simple, the older a given group of people, the more of those people who die per year. Therefore, as you get older you can expect term insurance costs to rise which is why ART premiums go up each year.
Whole life insurance is an attempt to level the increasing cost of term insurance. Essentially you pay relatively more in the early years, to pay relatively less in later years (by comparison to term insurance). What is happening is that that the life insurance company is taking the extra money you are paying, over and above the cost of term insurance, and investing it ahead in order to keep costs lowere in the future.
A number of term insurance policies incorporate a pay ahead concept to level costs for a limited period of time. A 20 year term charges you more in beginning, and less later, versus an ART product. However, both policies have annually increasing term insurance costs at the end of 20 years.
In a whole life plan, the leveling concept is a lifetime objective. That is where cash values come from. Essentially cash values are created by all the extra money, plus interest earned, that you have paid the life company in the early years. The cost difference between whole life and term can be huge.
This is flat out wrong and misleading. The premium is much higher with whole life than term. If you accumulate CSV in a WL policy equal to the premiums paid over a period of time (net of taxes), what is your cost? Your cost is ZERO. You could surrender the policy and you had insurance for free over the life of the policy. If you buy a 20-year term policy and you outlive it, your cost was the premiums paid over the life of the policy. Which policy cost more?
The question as to which to buy are:
1. Do you need life insurance for your whole life? For most the answer is NO.
Do you need life insurance at all? NO. Nobody has been denied death because they didn't own life insurance. If you understand how permanent life insurance works, you may WANT it.
2. Is the company giving me a "good deal" versus buying term and investing elsewhere? In some cases the deal can be very good, when taking into account the tax deferral benefits.
Comparing WL to investing is apples and oranges. Investing involves risk of loss. There is no investment risk with a WL policy.
But generally it is a VERY BAD idea to buy a whole life policy with the plan to cash it out in the future.
I agree. Cashing out a WL policy is the worst way to access the CSV. Loans and leveraging the death benefit to gain income options in retirement is the best way to utilize a WL policy.
If a consumer wants multiple income options in retirement, they need a permanent death benefit on the shelf. If they want a risk-free account that compares very favorably return-wise with savings accounts and CDs, they should buy WL insurance. If a consumer does not want these things, they should not buy permanent WL insurance.