Why is term life insurance the right choice in most cases?
- Term life insurance is one of two categories of life insurance.
- Consumers must decide between term and whole life coverage.
- Term life insurance is a better choice in most cases for several reasons, including its lower cost.
Most people need life insurance to provide financial protection for loved ones in case of their untimely death. But consumers shouldn’t buy just any type of life insurance. Policies can be broadly divided into two different categories: term life insurance and permanent or whole life insurance. And in the vast majority of cases, term life policies are by far the better option. Here’s why.
1. Term life insurance is cheaper
The biggest reason that term life insurance is a better choice for most people is because it is a lot cheaper to get this kind of coverage than to get whole life insurance. For a young and relatively healthy person, term coverage can be obtained for a few dollars a month.
Whole life coverage costs as much as five to 15 times more than term life coverage. This added cost can put it outside of most people’s budgets. Even worse, the added expense of whole life insurance is usually not actually worth paying. Here’s why.
2. Most people don’t need whole life coverage
Another big reason why term life insurance is a better choice in most cases is because that’s all the coverage most people need.
See, life insurance is meant to help surviving loved ones fulfill their responsibilities and maintain their living standard after a death occurs. A death benefit does things like replace income from the deceased so a spouse can pay the bills and cover educational costs for surviving children.
At some point in everyone’s life, though, kids grow up, mortgages get paid off, and paychecks get replaced by retirement accounts that will still be there even if one spouse dies. Once that happens, there’s no longer a need for life insurance.
With a term life policy, it’s possible to pay for coverage only during the 10 to 30 years or so when it’s actually necessary. With whole life policies, though, premium prices are higher because consumers are buying lifetime coverage that they don’t actually need.
3. There are better investments out there
Whole life policies are more expensive not just because they provide lifetime coverage, but also because there is an investment component to them. The idea behind the policies is that some of the premiums are invested and the policy accrues a cash value. There are different ways this works depending on the kind of permanent insurance, with some plans offering guaranteed returns and with others offering returns based on the performance of chosen investments.
Regardless of the type of whole life policy, there are often fees to cash it in, and accessing the money invested in it can come with lots of strings attached. The returns may also be lower than those that would be available with other investments.
For these reasons, most people should buy cheaper term life insurance and invest the difference that they would pay for a whole life policy. This will likely be the best move to build wealth and provide the protection that loved ones need for an affordable price.
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