Term Life Insurance vs. Whole Life

I previously wrote about the three essentials to financial defense. One of the keys to a good financial plan is to have life insurance in place if you have individuals in your life who depend on your income. Having life insurance provides a sense of peace knowing that your family will be taken care of should the unthinkable happen. There are two types of life insurance: whole life or cash value life insurance and term life insurance.

Whole life insurance builds a cash value inside of the insurance policy. They have an average rate of return of 1.5% and are 20 times more expensive than term life insurance. If you were to die, the policy will pay the face value of the policy, but will keep the cash value that has been earned over the life of the policy (i.e. your money).

A whole life policy with a face value of $125,000 is likely going to cost you approximately $100 a month. A term life policy worth the same face value ($125,000) would cost you approximately $7 per month. If you were to invest the $93 difference for 30 years, you would have approximately $200,000 (at a 10% interest rate). Needless to say, you want to avoid whole life insurance and chose term-life insurance.

How much term life insurance should you buy? 10-12 times your annual income on you and your spouse. The reason for that amount is that you want to purchase enough insurance to live off the earning each year, while keeping the principle level. If you make $100,000 a year, you would want to purchase $1-1.2 million in term life insurance. If you were to die, your spouse would invest that money into good mutual funds with an investment professional and live off the earnings each year to replace your income. That may seem like a lot of insurance, but it is relatively inexpensive if you are healthy. Check out Zander Insurance for a free quote.

How long of a term should you buy? Until you are self-insured, which means that no one else is depending on your income. Once your kids are grown, your house is paid off and you have a significant amount of money saved in the your retirement accounts; your need for life insurance disappears. If you have small children, you will want to purchase at least a 20-year life insurance policy. If you are further along, you can purchase a shorter term.

If your spouse stays at home, you still want to purchase life insurance for them as there will be costs associated with the care of the children if your spouse were to die. The right amount is dependent on your individual situation, but a general rule is between $400-500,000 in term life insurance.

Be a blessing to your family and protect them today. If you need help walking through your specific situation, schedule a free 15-minute consultation below.

Stay safe and stay well.