Life Insurance: Permanent (Whole Life) vs. Term

Most people could benefit from having life insurance.  In a previous post, I covered a few scenarios like if you have young children, a mortgage, etc. where life insurance is probably needed, even if you’re a millennial just starting out in your career.

There are so many different types of life insurance options that it’s easy to feel confused on which policy would be the best fit for you.  And if you ask an insurance agent, there is a very high chance they will recommend you get a permanent (i.e. whole life, universal life or variable life) policy because it’s the most expensive and they will get the most commission.  The biggest hook they use to lure you into buying permanent insurance is the cash value savings component.  They’ll tell you that in addition to buying life insurance that never expires (unlike term insurance, which will expire), you are also building up a savings account.

However, besides the the big commission they get from a permanent life insurance sale, here are few other considerations insurance agents might conveniently leave out:

1)  You might not really need life insurance.  Life insurance is for protecting your dependents so that when your income is lost, the death benefit (amount your beneficiaries would receive when you pass) will allow them to maintain their lifestyle or at least it’d alleviate some of the financial burden while they adjust.  But if you’re single with no kids or parents who depend on you and you don’t have any large debt that needs to be paid off, then you don’t have much of a need for life insurance.  It’d be like getting car insurance when you don’t drive.

2)  Term insurance might be better for your cash flow needs.  Let’s just say you buy a term policy with a $500,000 death benefit, it might cost you as little as $17 a month.  But for a permanent policy with the exact same death benefit, it might cost you something closer to $400 a month.  A lot of us millennials need that extra $383 for other financial priorities (paying off student loans, saving for retirement, building an emergency fund, etc.).

3)  Investing the difference between the cost of term and permanent insurance gives you more savings in the long run.  There is a popular saying that goes “buy term and invest the difference.”  Using the example from above, you would buy the term insurance for $17 and invest the difference ($400-$17 = $383).  Chances are, if you invest the difference in the stock market, you will end up with more money than if you had “saved” it in a permanent life insurance policy.  This will, of course, heavily depend on what investments you select.

If all that was confusing, here is a shortcut: Term insurance is most likely better for you than permanent insurance if…

  • you have student loans or credit card debt
  • you’re not saving a lot (or at all) for retirement
  • you don’t have an emergency fund
  • you have large expenses coming up (wedding, car purchase, home purchase, a baby on the way, etc.)