Broker Check

Cost Analysis: Whole Life Insurance Vs. Term Life Insurance

July 08, 2019

"Is Whole Life Insurance Expensive Or Simply Costs More Than Term Insurance?"

I have heard from many people that when they were in the process of purchasing life insurance, they didn’t ever consider buying whole life insurance. They only wanted term insurance. When I asked why, many respond with a variety of reasons such as the following:

  • How they have done research and simply found it too expensive to purchase
  • They didn’t feel it was worth purchasing
  • They can get better returns in buying term and investing their expendable income elsewhere

The relative cost between term insurance and whole life insurance does make people weary and apprehensive at paying higher premiums than term insurance. The truth is, whole insurance does cost more than term insurance. Being a professional in the industry and have sold a lot of life insurance thus far as part of the planning process, I will absolutely agree that the relative premium cost of whole life is more than term insurance.

However, it would be important to understand the mechanics of why it requires more premium, not that it’s simply “more expensive”. Similar to cars, that while a 2007 Honda Civic may get you from “point A” to “point B” a 2019 Lexus IS350 will do the same, but the variance in price is quite noticeable because of the extra features and add-ons the Civic may not come with.

When it comes to discussing life insurance there are two fundamental chassis, temporary and permanent life insurance. Let’s associate term insurance to be temporary insurance. As long as you pay the premium for the time you have the contract (i.e. 10, 15, or 20 years) the insurance is in force. Should a claim be filed as a result of a premature death of the insured, the benefit is paid to whoever is listed as a beneficiary on the contract. If this happens after the term policy expires the benefit will not be paid.

Essentially, one is betting that if they die during the term coverage their family will be taken care of. The insurance company may bet otherwise based on the health, which has different ranking categories, that the healthier one is, the lower the premium might be. The rationale is the “risk” associated with dying in the term period is low therefore the insurance company may gladly accept the premiums.

Hence the cost-effectiveness behind the contract can be somewhat justified. Obviously, if someone applied for any life insurance with pre-existing medical conditions (i.e. – sleep apnea, epilepsy) those risks are factored in the pricing of the policy, which may increase the premiums accordingly.

In the realm of whole life insurance, which is permanent insurance, there are a lot more factors that may justify the high premium. While there are a number of different types of permanent insurance policies that exist, whole life being the more commonly known amongst consumers may be structured to last until 120 years old*.

In the contract there are a number of add-ons that term insurance does not have:

  • An increasing death benefit
  • Dividends that are issued into the policy or may be paid out to the owner**
  • Increasing cash value
  • The guarantees that the policy will not lapse***
  • May structure a financing term such that they may cease paying premiums after a relatively short period of time (i.e. 10 years) to achieve having permanent life insurance
  • Provide tax-advantage income that may offset using personal cash flow to pay for bills or supplement income during retirement
  • Create a way to perpetuate wealth for future generations
  • May be utilized with gifting or charitable planning strategies

While all things being equal, both types are contractually setup to pay death claims the underlying features of both are noticeably different. Therefore, when addressing one’s risk management element of their overall plan, it is important to make sure the suitable amount of insurance is in force in the event of a premature death. One type of insurance is not justifiably better than the other.

I have not met a beneficiary of a policy, care about the type of insurance their loved one had before they died. Their main concern was filing the claim and make sure the claim was paid. Nonetheless, when one creates their insurance portfolio perhaps this information will shed light on the overall concepts of why the premiums are more than term insurance. Not that it is simply more expensive.

Registered representative of and securities offered through Hornor, Townsend & Kent, Inc. (HTK), Registered Investment Advisor, member FINRA/SIPC, 600 Dresher Road, Horsham, PA 19044, (215) 957-7300. HTK does not accept time-sensitive or action-oriented messages delivered via e-mail, including authorization to “buy” or “sell” a security or instructions to conduct any other financial transaction. 2607814AL_JUN21