whole life insurance cost may not be as clear as you think

Does Whole Life Insurance Cost More than Term Life Insurance?

You might have heard that whole life insurance cost more than term life insurance. This very statement is the foundation of many arguments suggesting that term life insurance is simply a smarter financial decision.  

We wanted to test this argument, so we gathered some data to understand what makes term life insurance cost so much better in comparison to whole life insurance. Our findings contradict this sentiment, so we encourage you to read. You'll likely learn something fascinating today.

Whole Life Insurance Cost vs. Term Life Insurance Cost Overview

Term life insurance premiums often appear much lower than whole life insurance. This frees up lots of your dollars.

We looked at a specific example of an individual male looking to purchase $1 million of life insurance and comparing the options available with whole life insurance and term life insurance. The initial premiums are different.

But term life insurance runs into some longevity problems that might cause some financial distress as you age. Additionally, people change as they age, and the primary objective might shift against term life insurance's favor.  

Term life insurance has its pitfalls for sure, but it's hard to argue that buy term and invest the difference nets you a bigger pot of money.  

You'll save more money versus whole life insurance…maybe.

There is one term strategy that could cost you dearly, and whole life insurance will, with near certainty, come out way ahead.

Whole Life Insurance and Term Life Insurance Premium Comparison

Term life insurance premiums are always initially less than whole life premiums. Here's an example. Consider a healthy 35-year-old male who is looking to purchase $1 million in life insurance. If this individual purchases a whole life policy, he'll pay $10,970 per year. This assumes he qualifies for the best risk assessment by the life insurance company.  

The same $1 million death benefit on a 20-year level term policy costs him $412 per year. Again, this assumes he qualifies for the best risk assessment.  

That's no typo. I didn't leave out a zero on the term premium. It's really $10,558 less than the whole life insurance cost. I know what you are thinking. Who on earth buys whole life insurance if this is the case?

The End of the 20 Year Term Policy

The $412 annual term insurance cost is for 20 years. At the end of the 20 years, the policy goes away. So to keep a death benefit, our now 55-year-old male, must buy another life insurance policy. Another term life insurance policy with a 20 year level period.  

This time, however, he won't pay $412 per year. Now he'll pay $1,643 per year. Again, this assumes that he qualifies still for the best risk assessment from the company. 

Twenty years from then, our individual is now 75, he'll need to purchase life insurance again. The problem is he cannot. Presently life insurers will not issue a 20-year level term policy on a 75-year-old.  

So let's not worry about life after 75 for the moment. Let's focus on how things have gone up to that point.

If our individual bought term life insurance and then rebought term life insurance at 55, he spent $61,102 in life insurance premiums up to this point.

If he bought whole life insurance, he paid $438,800 in insurance premiums. This isn't looking all that great for whole life insurance…

Except that he'd also have $1,335,392 in cash value inside that whole life policy and a total death benefit of $2,213,635. That's a considerably higher death benefit than the initial $1 million.  

Buy Term and Invest the Difference

The whole life policy, in our example, boasts $1.3 million in cash value at age 75. But the term advocates will suggest that since you have $10,558 leftover (for the first 20 years), you could take that difference and invest it. If you did that, you'd probably accumulate more money than the whole life policy.

So we crunched the numbers to see how things stack up. We'll assume that our 35 year old will invest the entire difference between the whole life premium and term life premium. This is $10,558 for the first 20 years. Then we'll assume the last 20 years he has $9,327 to invest each year. This accounts for his having to buy a new term policy at 55, which is more expensive.  

We'll assume the return, net of fees, taxes, and adjustments he'll need to make as he gets older and wants to take on less risk, is 6.5% per year for the entire 40 year period.  

Doing this, we see that the invest the difference strategy should produce an account balance of $1,645,023. This isn't looking so good for whole life insurance.

It's at this point; most term life only advocates declare victory. But before we call this one, we want to explore some additional considerations.

Legacy Matters to People

Our career in the insurance industry spans several decades. When you get this point, you experience a lot of different interactions and gain understanding about what drives people that aren't always obvious at 22.  

For a lot of older and more experienced people, their worry is more about legacy.  

We see from above that buy term and invest the difference bests purchase whole life insurance in terms of projected cash value by almost $310,000. That's a lot of money.  

But we forget that at this point the term life insurance goes away. So our individual carries on with his $1.6 million and no life insurance. Many might point out that with $1.6 million, he'll probably be just fine.  

But if he owned whole life insurance instead, he'd have over $2.2 million in death benefit. If this mimics the behavior we see among people in their 70's and older, his concern about legacy becomes important. 

I'm not saying everyone thinks like this. There was a time I thought no one thought like this. Each year, I learn the number of people who do think like this is substantially larger than I ever imagined. I also find that as I get older, I think about it; I'm nowhere near 75.  

So while buying term and investing the difference might produce $310,000 more cash for our hypothetical client, it sacrifices $568,612 in cash, the client could leave behind.  

A Life Insurance Argument Built on Assumptions

Buy term and invest the difference works out better provided a lengthy number of assumptions work out as planned.

  1. You actually invest the difference. This one causes a lot of problems from the get-go.  

  2. You can actually continue to buy term life insurance. In our example above, the client maintained his excellent health through his 50's and qualified for the best rates as a result. If the underwriting assessment at 55 finds his health average, his premium for term life insurance increases from $1,643 to $5,144.  

  3. You actually achieve the rate of return assumed. 6.5% might appear small against some of the numbers other investment gurus talk about, but I'm talking net return. Also, remember that this is about 2% higher than the average gross return achieved by stock market investors according to DALBAR research.  

  4. You NEVER touch any of this money until age 75 for any reason whatsoever. Selling off investments because you need the money can hurt your overall return, especially if you have to sell when the market is crashing. Unfortunately, rises in unemployment and market crashes tend to happen around the same time.  

From Super Healthy to Standard

I mentioned in the last section that if our client is in average health at 55, he'll pay a lot more in term life insurance premiums. 213% more to be exact. Keep in mind this doesn't assume that he has some major health issue. Only that he's no longer young and in great shape. 

As life unfolds, careers get more stressful, kids come along, and you simply have more to lose those stresses can make you a little less apt to get in a lot of workouts.  

Lots of people go through a second growth spurt, only this time it's horizontal. With each year that ticks by, you have yet one more chance for something to come along making you no longer the super healthy super low insurance risk you once were.  

If we go back and plug the buy term and invest the difference numbers in assuming that our client is just standard health at 55, our results change a good bit.

Now he only has $5,826 to invest after paying term life insurance premiums for the second 20-year stretch. This results in a much lower accumulated $1,438,905. Still higher than the whole life policy, but now only around $100,000 higher. This also means sacrificing even more value on the legacy side, $774,730 to be exact.  

Term Life Insurance You Can Keep

At one time, you could buy term life insurance with a level premium for a specified period and keep the policy after this level period. You had to pay an ever-increasing premium in order to keep the policy, but so long as you paid this increasing premium, you could keep the death benefit.

The rules on this changed quite a bit over the past few years. Now few life insurers offer term life insurance that you can keep. Instead, the policy simply ends at the end of the level premium period.

But, some life insurers still offer term life insurance that you can keep provided you pay the increased premium. So, why not just buy this type of term life insurance. Since you qualify for great rates now, wouldn't it benefit you to continue to pay the increasing premiums as a preferred risk rather than potentially at some lesser in the future?

Makes sense, but unfortunately, it doesn't work.

Going back to our original example, a term life policy that allows the policyholder to continue paying increased premiums after the 20 year level period will cost $423 per year — a very modest increase over the original term life policy.

But after paying all the increases in premiums in years 21 through 40, our client will pay $827,010 in premiums. That's $388,210 more than the whole life policy premiums over the same period. Forget invest the difference. He'll run out of money due to the premium increases.  

Is Term Life Insurance Cheaper than Whole Life Insurance?

Term life insurance is only cheaper than whole life insurance if you don't internalize the options that whole life insurance brings to the table. In the absolute sense of what it cost you today, forgetting about tomorrow, term wins. In the absolute sense of how much money can I spend immediately on myself, buy term and invest the difference might work provided a large set of assumptions work out in your favor.

Whole life insurance brings a lot to the table to consider. Anyone who suggests otherwise is trying to sell you just as hard (or harder) than the person suggesting you buy whole life insurance. 

About the Author Brandon Roberts

Brandon launched the Insurance Pro Blog in July of 2011 as a project to de-mystify the life insurance industry. Brandon was born in Northern New England, and he currently calls VT home. He attended Syracuse University and graduated with a triple major in Economics, Public Administration, and Political Science.

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