When trying to figure out whether to buy whole or term life insurance, there are several things to consider.
Whole life policies have several good qualities, such as the possible pay out of dividends and the accumulation of cash value that can be borrowed against it if needed.
While a line of credit backed up with equity is always welcome in times of extreme need, a whole life policy can be very expensive, possibly leading to the need that leads to borrowing against one's own cash.
Whole Life Costs More Than Term
If a young man under thirty was to purchase a whole life policy worth $100,000 today, he could do so at the price of about $150 a month.
However, for $150 a year, that same person can purchase $250,000 of term life insurance that would be in place for 20 years. The difference between the two policies is not just the $150,000 more that one's beneficiary would receive in the event of his untimely passing, but also the $1,650 extra it would cost every year to maintain the whole life policy.
The difference could be applied to a home mortgage, invested in a CD, or the stock market.
Paying Down Home Loans Faster
Susan and her husband just bought their first home, a three bedroom split-level, with a 7.5% mortgage of $150,000. Susan has also decided to purchase a term life insurance policy worth $250,000, costing her $150 every year. She decided to purchase term life rather than whole, because she wanted to apply the additional $137 a whole life policy would cost every month to her new mortgage.
The result of Susan prepaying her mortgage by just an extra $137 each month is that rather than pay more than $377,000 for her home in principal and interest over 30 years, she will pay $298,000 over 21 years, resulting in a savings of $89,000!
Had Susan passed away before her house was paid off, her life insurance would have left her husband with greater financial security than the whole life policy she had considered worth $100,000. And although Susan will not have insurance 20 years later, she will have the insurance of owning her own home that has very likely gone up in value.
Invest Extra Money Into Certificates of Deposit (CDs) and Stocks
If Susan was to continue investing the same amount of money and nothing more, splitting it into CDs at 3% and the stock market at 6%, she could insure herself even further.
Assuming that she will only invest until retirement, which she plans on being 20 years after her home is paid off, her stocks and CDs will start at $825 each, rolling over each year with an additional $825 added. The CDs will accumulate to more than $24,300 while the stock will net her more than $34,800.
After 40 years, Susan will have saved over $59,000 in cash in her modest portfolio and $89,000 in interest on her home mortgage.
By forgoing a $100,000 whole life insurance policy that may or may not have paid dividends, Susan has gained almost $150,000 between mortgage savings and small investments that would have otherwise been split between an insurance company and the cash value of the whole life policy, leaving life insurance to be something to think about before committing to.
Disclaimer: This article was written for informational purposes only. Please consult a licensed financial adviser when considering investment opportunities.