Term Life Insurance Versus Whole Life Insurance
It's time to visit a debate as old as time itself. What might that be, you ask? Could it be North Carolina’s vinegar-based sauce versus Memphis dry rub barbeque? While that sounds like a delicious debate, we're going to tackle something slightly more substantial: life insurance.
Scripture makes it very clear that we are to provide for and care for our families. 1 Timothy 5:8 says if you don't, then you have denied the faith and are worse than an unbeliever. If you have a spouse, children, or anyone who depends on your income, life insurance is one of the ways you can take care of your family. You are not promised tomorrow. Life insurance ensures provision for your loved ones after you depart from this world.
But what kind of life insurance? Insurance companies have many options, several that can be confusing. For this discussion, we will focus on the most popular two options: Term life insurance and whole life insurance.
What is term life insurance?
As its name implies, term life protection for a specified period of time. Typically, you can choose from 5, 10, 15, 20, or 30-year plans. At the end of the term, your insurance expires unless you elect a renewal option.
With term life, you have many options when it comes to the death benefit. The death benefit is the amount the policy’s beneficiary receives upon your death. The death benefit could be a few thousand dollars or several million dollars, depending on the amount you need.
One of the biggest pros of term life is the cost. According to Policy Genius, a healthy 34-year-old man could get a 20-year, $500,000 policy for $20-$39 per month. The amount you pay for the policy is called the premium. In general, the younger and healthier you are, the cheaper the insurance premium. If you were to pass, the death benefit goes to the beneficiary tax-free.
Here are some of the pros and cons of term life:
Easy to understand
Tax-Free death benefit
More coverage at a lower cost
No cash value
Coverage is temporary
- Difficult to obtain coverage when older or unhealthy
What is Whole Life Insurance?
Whole life insurance is one of a few different types of "permanent" life insurance. The idea behind whole life insurance is that it lasts for your whole life. As long as you continue to pay the policy’s premium, the beneficiaries will receive a death benefit after you die.
Whole life policies provide the opportunity to build cash value within the policy. In other words, a portion of your monthly payment goes into a cash value account which then earns a guaranteed interest rate. The policy owner can borrow against the cash value. The money you borrow can be used for anything you like. However, your death benefit will go down if you don't pay the money back. There may also be tax implications.
What's the catch with whole life policies? In generally, whole life policies are more expensive compared to term life policies. Remember how I said you could get a $500,000, 20-year term life policy for about $20-$39 per month? A whole life policy will cost at least ten times more. According to State Farm, a healthy 30-year-old woman could expect to pay $411 per month for a $500,000 whole life policy.
You may find yourself in a bind if you need the cash value within the first few years of owning your policy. Many whole life policies include a surrender charge, which is a penalty you pay if you close out your policy too soon.
It's also worth noting that with most whole life policies, any cash value left in the policy upon death goes back to the insurance company.
Here are some of the pros and cons of whole life:
Builds cash value
Same payments for life
Variety of estate planning applications
Useful for high earners and high net worth individuals
Tax-free death benefit
May include surrender Charges
Cash value accumulates slowly
Outstanding loans reduce the death benefit
- Cash value forfeited to insurance company upon death
Which type of life insurance do I need?
For most people, term life insurance is perfectly sufficient. It’s the most cost-effective way to protect your family in the event of your death. If you do things properly and follow the Money Milestones, you will most likely have enough at the end of the term to be self-insured.
Unfortunately, whole life is over-sold. For most people, buying whole life is like buying a dump truck when all you need is a sedan. Dump trucks can be useful in specific situations, but they're also more expensive to buy, maintain, and fuel. Here are some of the proper applications for whole life insurance:
When you've maxed out all other retirement savings vehicles
When you have a life-long dependent (e.g., a child with a permanent disability)
When you have a large estate and need a strategy for paying estate taxes (For 2023 you must pay federal taxes on estates larger than $12.92 million)
When you own a business and need a succession plan in the event of the unexpected death of a partner or key employee
Steward wisely and provide well
In conclusion, I entreat you to love your family well. The best time to get life insurance was yesterday. The next best time is today. Do we need to plan for the future, save for retirement, and live generously? Absolutely. But it’s just as wise to plan for contingencies.
As always, carefully and prayerfully make a wise decision. If needed, talk to a trusted professional, like a Kingdom Advisor, who can properly examine your situation and make an appropriate recommendation.
Consider your options and choose the insurance that allows you to provide well for your family and keeps you invested in the advancement of God's Kingdom.
And remember, don't let anyone sell you a dump truck when all you need is a sedan.
About the author: Jon Matlock serves as a financial planner at American Financial Planning, Inc. in Roanoke, Virginia. He is a CFP® candidate, a professional member of Kingdom Advisors, and a graduate of Southeastern Seminary. Before pursuing financial planning, Jon served overseas with the International Mission Board and also worked in their Church Success Center. In his free time, Jon enjoys serving his church, hiking in the beautiful Roanoke Valley, and spending time with his wife and son.