One of the first decisions a person faces when comparing life insurance options is whole versus term. We have multiple articles such as (excuse the lack of creativity) Whole versus term life or Why term life?. Those are breakdowns of how insurance works as a result of years of experience but we want to provide a strategy to accomplish the same effect of whole life at less cost.

A real quick refresher to start with. Term life insurance is a fixed amount of life insurance benefit for a fix period time with a fixed premium. For the same amount of premium, whole (in which we include variable, universal, etc) life insurance as a contract to term usually has a smaller amount life benefit with the ability to grow some sort of cash value over a period of time and the policy does not cancel as long as you pay the premium. There may even be a time when the dividends, investment, etc will pay the premium after a certain period of time. So that's the lay of the land. The big difference is that Term is much less expensive but it stops after a certain number of years. If you want more insurance after that term, it will likely be very expensive. Now that we have a basic comparison (and of course it can differ in many ways depending on the policy and options you are looking at), let's look at a different strategy that combines term life insurance and investing or saving.

Let's say for a given amount of life benefit, term is 1/5th the cost of whole life. It can be higher or lower, but let's go with 1/5. For example, $100K of life benefit immediately is $20/monthly for 15 years of term and $100/monthly for whole life. The difference is $80/monthly or almost $1000 annually. Now, proponents of whole life will say that the benefits of whole life is that you're building cash value. Make sure to ask them for a schedule of what that looks like. It will likely resemble a drip and not a rush. This is the simple truth. The life insurance company is essentially providing $100K of term life with $20 of that $100 premium. They then take the other $80 and invest it. A portion of the investment gains are then contributed to your "cash values" while they keep the rest as profit or to run their company. A key consideration with any financial instrument is "expense ratio" or how much a company charges you to manage a given financial vehicle whether it's mutual fund, ETF, etc. We need to apply the same thought to the management of this $80 from the life insurance company. The number floated around for whole life expense ratio's is 2-4%. It's hard to know for sure since it's built into their model. That's much higher than most ETF's or Mutual Funds.

$1000 annually times fifteen years with compounded interest/investment gains at 7% is almost $30K. That's 30% of the term life amount. The next time a company is so excited about whole life insurance or any life insurance tied to a cash value component, ask them for the schedule of cash value over the life of the policy. Quickly compare this with a term life insurance quote through our site and then run the difference in annualized premium through a compound interest calculator. You're probably going to find that the insurance company is charging you quite a bit to "invest" for you through a whole life policy.

Some people then say...well...I don't know if I will have the will power to invest that $80 on my own. I might just spend it. The question then is, do you want to spend that money on supporting a life insurance companies profit or expenses? Because a big chunk of that net difference will be doing so. Unless you love giving extra money to life insurance companies (who knows...there's probably some one out there...way out there) and or the life insurance agents that market whole life, you may want to run the numbers and see affordable term life insurance and investing is the right strategy for you.