Should I buy whole or term life insurance?


The best kind of life insurance for most people is simple term life, where you pay $X for $X to be paid to your beneficiary when you die.There are other types of life insurance, like whole life, which combine an investment with term insurance.

Simple example, you can buy a $1 million policy, if you’re young and healthy, for perhaps $500 in premiums a year, with the $500 cost guaranteed for 10 years. You can buy that same term life policy as part of a “whole life” policy for $1,000 a year, with the $500 per year invested at, say, 5% per year (just using the 5% as a placeholder, it depends.) Mathematically, after 10 years, you would have an investment worth $6,329, representing the $5,000 in principal and $1,329 in accumulated investment earnings.

You can essentially do the same economics, by buying the term policy, and investing the extra $500 per year that you would have paid the insurance company, into another investment. If you instead invest those funds at 5% a year, you’ll also end up with a $6,329 investment.Sounds like a push? Well, it isn’t. Because you can most likely earn more investing in your own than the insurance company will pay you…simply because the insurance company has to pay you less because they need to make a profit.On top of that, there is less flexibility to change your investment in the insurance company if you want to. While for the investment on your own, you can change it whenever you choose.That is the simplest way to look at it….whatever return the insurance company will pay you for your “investment” will by nature be less than what they earn on it than you can. You’ll be better off investing it yourself.