Whole vs. Term Life Insurance: perspective from Rich Wesselt

Life insurance is a critical component in financial planning and estate planning. Perhaps most importantly, it provides a level of protection and support for your family.

There are two primary categories of life insurance plans available, but perhaps the most common is a “term” plan. Term life insurance policies are intended to cover a specific time period. Upon expiration, they have to be renewed. The other option is a whole life insurance plan, which — while a more expensive upfront investment — is often a more financially sound and efficient plan. They provide a sound savings vehicle and lifetime protection, which are the main components of a strong financial plan.

The Issues with a Term Plan

Term life insurance allows consumers to purchase plans with a set amount of years attached to them, from as little as 10 years up to 30 years. The up-front investment tends to be lower than that of whole life insurance because term policies only guarantee coverage through the end of the contract. This is by design — they are intended to pay beneficiaries when the policyholder dies in a premature or untimely manner.

This is the main drawback of a term plan: they can expire within the policyholder’s lifetime. This opens up a myriad of potential issues, particularly around the possibility of needing to purchase another policy later in life. The average yearly rate for a 50-year-old non-smoking man with a 20-year term life insurance plan with a $500,000 policy is $1,077 per year, far larger than the rate for the same plan at age 40, $420 per year. Age isn’t the only factor driving up premiums. If the policyholder develops an illness or health issue, they can expect even greater rate hikes. While a term plan may appear to be a more affordable alternative, it carries significant risk and the potential to be extremely expensive.

The Strengths of a Whole Life Plan

Whole life insurance carries no potential complications around age, illnesses, or other circumstances. The policyholder pays a level contribution that never expires and covers the entire lifespan of the holder. This comes with a permanent death benefit and no need for future renegotiation based on medical issues.

The perceived issue tends to be cost, and while it may be greater initially than a term plan, the premium from a whole life insurance plan can be an incredibly valuable tool. This premium can be used as both a means of investing and saving, as over time it accumulates cash value. It also is often useful in retirement planning because of its versatility and strong investment potential.

In fact, during my career, I have seen these portfolios offer bond-like yields of three to five percent and become key assets in well-diversified portfolios. One option I frequently see is using the security of the policy to justify more aggressively investing 401(k) assets in equity funds, as the consistent, safe, bond-like yield of the whole life insurance policy assets serve as a buffer.

Financial Flexibility

In addition to their versatility, whole life policies also are a boost to financial flexibility. Most commonly, a whole life policyholder can borrow against the cash value of their policy and set a payback schedule, which allows the cash value to continue earning while the policyholder pays off the loan over time.

For example, for a policy with a $20,000 cash value, the holder could borrow against it with a $10,000 loan. The $20,000 would continue accumulating and the holder would be able to steadily pay back the $10,000. The policy also can be used as collateral when seeking a loan at the bank.

Consistency and Versatility

While term life plans may be the more frequently employed policy, that does not mean it’s a superior option. Whole life insurance allows for greater financial flexibility, strong investment potential and avoids any issues with rate hikes due to age and medical concerns. It is the ideal option for new families and adults seeking long term security for themselves and those around them.

About Richard Wesselt

With over 23 years of dedication to the financial services industry, Rich brings a wealth of knowledge and experience in helping clients plan for a secure financial future. As principal of the Wesselt Capital Group, Rich uses a relationship driven, individual-based approach to macro economic planning. Rich has a bachelor's degree in Economics from the Wharton School and is a member of Top of the Table. He holds his FINRA Series 6 Registration. Follow him on Twitter @RichWesselt.