As an insurance agent, the most common question I get is: “How Can I Save Money on Insurance.”
Depending on the type of insurance that we are talking about, the answer can be quite simple.
Assuming you are asking about buying life insurance, the answer is pretty simple: “Buy Term Life Insurance”
There are some good reasons to consider whole life insurance., such as for a special needs trust. But in general Term Life rules the day.
What is Term Life Insurance?
Term life insurance is a form of pure insurance. Its actually more similar to home insurance in some ways than its cousin whole life insurance. With home insurance, you pay a yearly fee and if there are no claims, than you get no money back. Many consider home insurance to be a waste of money, until that is, they have a home insurance claim. Term life is much the same. When procuring term life, you select a coverage amount (also called a death benefit) and a term length. The term length is the period of time that you have the coverage for (assuming you pay your bills) after which the rates will skyrocket. This is different of course from most American home insurance where each year you have to see if the insurance company will offer you homeowners insurance.
Term life insurance stands in contrast to Cash Value life insurance plans. Two of those cash value plan options are: Whole Life Insurance and Universal Life Insurance. Whole and Universal life have the same insurance coverages, but the length of the policy is intended to last your entire natural life AND they contain a Cash / Investment component. Of special note here is that considering whole life or universal life to be an investment is pretty debatable. Perhaps it is an investment and perhaps it is not.
So to summarize:
Whole Life = Complicated Insurance with an Investment Component.
Why is Term Life So Much Cheaper than Whole Life?
Because whole and universal life insurance are intended to last your entire life, be definition they will be more expensive. Think of it this way, if you were an insurance company would you prefer to write an insurance policy on a forty year old for twenty years or sixty years? Which would you charge more money for?
If it were I, I would charge much more for the person that wanted the life insurance policy for sixty years since they are going to be almost guaranteed of passing away during that time.
However there are two reasons why whole life insurance ‘can’ be more lucrative for the insurers.
- A large percentage of people that buy whole life insurance will cancel it in the first ten years, so says the Wall Street Journal. So when this happens, a client spends the initial years worth of life insurance at the much higher rate, only ending up to cancel it before they are older. The insurance company can make out big time this way.
- The second way that insurance companies can make out selling whole life insurance policies is that peoples extra money, the so called investment account, side account, cash account, whatever you wish to call it – will sit around and make a paltry return. There are numerous studies available on the return of participating whole life insurance companies, but lets just say that Whole life insurance policies often do not pay a competitive amount compared with market returns. This is why calling a Whole life policy an investment account can be misleading.
How Much Less Expensive is Term Life Insurance Vs Whole Life Insurance in the United States:
There are numerous underwriting and benefit considerations when providing this number. In other words, each situation is different. But – generally speaking often term life insurance is just 1/8th to 1/14th of the cost of whole life insurance. In other words sometimes you can save almost 90% on life insurance, just by choosing term life.
I have seen situations when a Universal life policy is only two or three times the price of term life. (Note universal has its own issues, so I would be careful with them.) But they are still way more expensive.
How to Simply Buy Term Life Insurance:
Follow these simple rules when procuring level term life insurance in the US:
- Work with an Independent Life Insurance Agent.
- Get Quotes from multiple insurance agents.
- Only work with brokers or agents that you trust.
- Don’t sign anything that you do not understand.
- Do not buy more life insurance than you can easily afford.
- Compare life insurance numbers in conjunction with Financial Strength Ratings. Financial Strength Ratings are similar to credit ratings, but take into account policies in force.
- Ask your life agent about your specific health and lifestyle situation. Are you a Scuba Diver. Typical rates may not apply.
- Be very careful buying life insurance for any purpose other than pure insurance.
Scott W Johnson is the owner of WholeVsTermLifeInsurance.com – CA OH11625. Always speak with a licensed insurance agent each and every time you seek to buy, change, or amend any insurance. In the US life insurance is regulated by the state in which you live in.