Term Life Insurance – What You Need To Know
This lesson was made possible thanks to Pacific Life Insurance Company
Whole, Endowment, Term – there are many types of Life Insurance on the market. But most financial advisors will give you the same mantra – “Buy Term and Invest The Rest”. But what does that really mean?
Term Life Insurance
Term Life Insurance is a type of life insurance that has a time limit (or “Term”), usually for 10 or 30 years. This means that when you buy the policy, you agree to make monthly (or annual) payments for the entire duration. If you die during that time, the insurance policy pays out to whoever you specify in the policy (called the “Beneficiary”), usually your family members.
This makes Term Life Insurance a very straightforward, and popular, way for people to provide some financial protection for their families in case of death.
A common arrangement would be for a 22-year old, fresh out of school, to purchase a 10-year policy, with their parents or relatives as a beneficiary with a small ($10,000 – $20,000) value of the policy to cover funeral expenses. This policy would be very cheap – usually just a few dollars a month. Then when this policy expires 10 years later at age 32 (and they may have started a family of their own), purchasing a 30-year policy with a much higher policy amount ($500,000 to $1,000,000), giving their family financial protection in case of their death until retirement age.
Term vs Whole Life Policy
Whole Life insurance policies are the second most-common type of life insurance. Unlike Term policies, Whole Life policies never expire, and build up a “cash value” over time that you can borrow or withdraw from later (and grows at an interest rate that beats most savings accounts). This makes Whole Life not just an insurance policy, but also an investment vehicle that can be part of a retirement portfolio.
Because of the investment component, Whole Life policies have much higher monthly payments (a $500,000 Term policy might cost somewhere around $30 per month, while Whole might be around $275 per month), but are very simple and straightforward savings and investing mechanism.
But this is where the financial mantra comes into play – “Buy Term and Invest The Rest” means if you are choosing between a $275/month Whole Life policy and a $30/month Term Life policy (and are comfortable investing on your own or have a financial advisor to help), you have a higher expected rate of return by buying the $30/month policy, and investing the rest ($275 – $30 = invest an extra $245 per month).