Term vs. Whole Life Insurance

[Herberts Vasiljevs]

I've learnt about the basics between term vs. whole insurance, but I don't understand the point of whole - both for: 1) How it even fulfills its purpose as 'insurance', and 2) for arguments sake, as an investment vehicle. 

 

Thanks in advance, everyone! 

[Putgolzin]

Here's what I've heard Dave Ramsey blathering on about for years - basically he calls one a necessary, smart investment and the other a total scam.

I don't know or care enough to think much about it, I just bought Term and forgot about it.

 

https://www.fool.com/the-ascent/insurance/life/articles/dave-ramsey-says-this-type-of-life-insurance-is-a-way-to-screw-people-and-hes-right/

 

I think one of the key points is that they don't really give you your 'investment' back. Again I haven't looked into it for myself, but this article repeats:

And here's what Ramsey calls one of the worst parts of whole life insurance -- there's no getting both the death benefit and the cash value of your policy. When you die and the insurance company pays the death benefit, it keeps your policy's cash value. Or, if you cash out your policy, then there's no death benefit.

Edited September 1, 2023 by Putgolzin

[Bradwing19]

I have been licensed to sell life insurance in BC for thirty years.

 

People like to make it complicated but........

 

The basic difference between Term insurance and Whole life insurance, is that most term policies lapse before ever paying anything out. The premiums increase over the years and most often become unaffordable. Whole Life can be with you the day you die, if you live to 100 whole life pays out as if you had died. If at some time along the way you decide to cancel your whole life policy, you may receive cash back depending on how much is in the redemption pot. So the first decision is, do I want Permanent or Temporary insurance?

 

Remember too, Term can converted to Whole life. As I got older and my kids moved out, I lowered the face amount of my policy and converted 50K to Whole Life for final expenses.

 

Hope this helps.

 

 

[Ghostsof1915]

https://www.forbes.com/advisor/life-insurance/comparing-term-life-vs-whole-life-insurance/

[Dekey Pete]

Typically I see whole life insurance in private companies, for business owners that have already maxed out their RRSPs and TFSAs, and are looking for another tax-deferred way to invest their money.  You can invest your after tax corporate money in a whole life policy, and don't pay any tax unless you withdraw the cash value before death.  I think it's a lot more complicated than the guy in the article makes it seem (he hasn't considered tax at all, which for high income earners can be upwards of 50% these days).

 

Chances are, unless you're in this high earning business owner demographic, you probably don't need a whole life plan.  Your insurance broker should be able to explain the pros/cons of both options, and if it seems like they're just trying to push you towards whole life because they get a higher commission, without considering your personal situation, find a new broker.

[Ghostsof1915]

Some of us have life insurance through work. Which is nice. I just consider any insurance as something you don't want to collect on, but it's good that it's there.

[DonLever]

17 hours ago, Putgolzin said:

Here's what I've heard Dave Ramsey blathering on about for years - basically he calls one a necessary, smart investment and the other a total scam.

I don't know or care enough to think much about it, I just bought Term and forgot about it.

 

https://www.fool.com/the-ascent/insurance/life/articles/dave-ramsey-says-this-type-of-life-insurance-is-a-way-to-screw-people-and-hes-right/

 

I think one of the key points is that they don't really give you your 'investment' back. Again I haven't looked into it for myself, but this article repeats:

And here's what Ramsey calls one of the worst parts of whole life insurance -- there's no getting both the death benefit and the cash value of your policy. When you die and the insurance company pays the death benefit, it keeps your policy's cash value. Or, if you cash out your policy, then there's no death benefit.

That Ramsey guy is not totally correct.  He is correct in saying if you cash out your policy you don't get the death benefit.  Well that is obvious, if you are not dead how can you collect the death benefit.   You are still alive!   However, he is wrong in saying you don't get both the death benefit and the cash value.  Yes, you do.  There is a line in the policy that lists the amount that goes to the beneficiary when you die.  It could be be $5000, 10,000, 15,000, etc.   It is on top of the cash value.  The cash value is the amount accoumulated through many years.   It can be in the hundreds of thousands of dollars.  That amount of money is yours.   No different than money in a RRSP account.  So how could the insurance company take away your cash value and leave you with a measly $5000 or $10,000 death benefit.

 

This I know through personal experience of relatives.   My relatives could have cash out earlier but did not need the money so they kept the policy.  The person passed away and they got the cash value + the death benefit.

[spur1]

I had two whole life policies. One was in conjunction with an RRSP. I was able to start drawing on it at 65. I cashed it in and moved it to another RRSP and received $125,000 after paying in about $57,000 over 38 years. 
The other policy I have I paid about $20 a month for 35 years and is not an RRSP. It is worth about $25,000 if I cash in and is worth $50,000 if I die. I no longer make payments past age 65. 
Bottom line I had $100,000 life insurance from the time I was 30 for less than $150 a month plus a $1400 RRSP deduction for 38 years. 
Had I went with term insurance I would have paid less but I would now have only a death benefit. 
For a young person who is not an active investor I recommend to go for whole life over term. 

[DonLever]

5 hours ago, spur1 said:

I had two whole life policies. One was in conjunction with an RRSP. I was able to start drawing on it at 65. I cashed it in and moved it to another RRSP and received $125,000 after paying in about $57,000 over 38 years. 
The other policy I have I paid about $20 a month for 35 years and is not an RRSP. It is worth about $25,000 if I cash in and is worth $50,000 if I die. I no longer make payments past age 65. 
Bottom line I had $100,000 life insurance from the time I was 30 for less than $150 a month plus a $1400 RRSP deduction for 38 years. 
Had I went with term insurance I would have paid less but I would now have only a death benefit. 
For a young person who is not an active investor I recommend to go for whole life over term. 

You backed I what said.  That Ramsey guy is full of nonsense when he said you don't get your cash value back when you die.

A term policy is also more expensive if you start buying it later in life.  Plus if you stop payments your policy lapses and you get zero money.

[Kragar]

On 9/1/2023 at 11:37 PM, DonLever said:

You backed I what said.  That Ramsey guy is full of nonsense when he said you don't get your cash value back when you die.

A term policy is also more expensive if you start buying it later in life.  Plus if you stop payments your policy lapses and you get zero money.

IIRC, many whole life plans don't pay both.  Maybe things are changing lately after years of bad PR.  I've been out of that industry for over 20 yrs.

 

Anyhow, even with any enhancements they have made to WL plans, odds are you are far better off getting term and investing the money saved on cheaper term.   Dave says to invest 15% of your income and build up a nest egg enough to self insure.  If you have enough money to comfortably retire, you no longer need life insurance, so you never pay the inflated term prices once you get to your 60s (or earlier if you are smart/lucky).