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By: Catherine Hawley, CFP®, posted on 04/17/2017

Getting the Right Life Insurance at the Right Price

Getting the Right Life Insurance at the Right Price

While it may not be the most enjoyable thing to think about, getting life insurance is one of the best ways to ensure that your family will always have the financial resources it needs, even if you're not there to provide for them.

When you shop around for life insurance, you'll probably encounter two different types:

  • Term life insurance lasts for a set amount of time, typically 10-30 years. It provides pure protection and nothing more.

  • Whole life insurance lasts for your entire life, as long as you continue to pay the premiums. It also has a savings component that builds over time.

While insurance agents will often make whole life insurance sound like a good deal, the truth is that most people will save themselves a lot of money and create more financial security by sticking with term life insurance. Here's why.


The Premium Difference

Term life insurance is a much cheaper way to get the protection your family needs. I recently got quotes for a 34-year-old male in New York looking for $1 million of life insurance coverage. Here were the estimated premiums:

  • 30 year term life insurance = $939.98 per year

  • Whole life insurance = $11,240 per year

In other words, term life insurance would cost $10,300 less per year for the exact same amount of coverage. Needless to say, that is a stark difference in cost.


The Investment Difference

Cost alone is not an entirely fair comparison because there are differences in the policies. After all, whole life insurance accumulates savings in addition to providing protection while term life insurance does not. But even then you would likely come out ahead by buying term and investing the extra $10,300 elsewhere.

According to the whole life insurance illustration I received, the savings account was projected to grow to $739,945 after 31 years, which would equate to a 4.35% rate of return. Not bad.

But let's say that you put that money into a 401(k) instead. Using conservative estimates, you might expect to receive a 6% long-term return. After 31 years, that money would grow to $925,865.

But that's not the end of it. If you're in the 25% tax bracket, contributing $10,300 to a 401(k) would save you $2,575 in taxes each year. If you also invested that $2,575 and earned the same 6% return, you would end up with another $231,466 after 31 years.

So, in summary, here's how much money you would have after 31 years with each approach:

  • Whole life insurance = $739,945

  • Term life insurance and invest the difference = $1,157,331

Save Yourself the Money

Whole life insurance does make sense in some cases. For example, if you have a child with special needs or you have a significant amount of money that might be subject to estate taxes, you may consider a whole life insurance policy.

Most people will save themselves a lot of money by buying term and investing the difference.

Image from http://www.financeandflipflops.com/should-you-buy-term-insurance-or-permanent-insurance/