Term vs whole life insurance
Term life insurance pays a death benefit if you die during the policy term (typically 10, 20, or 30 years). If you outlive it, you get nothing. It’s pure protection, and it’s cheap. Whole life insurance covers you for your entire life and builds a ‘cash value’ that grows at a guaranteed (low) rate. The premiums are 5 to 15 times higher than term for the same death benefit, because the policy also has to fund the cash value and the agent’s sizeable first-year commission.
A healthy 30-year-old non-smoker can buy a $1,000,000, 30-year term policy for roughly $40 a month. A whole life policy with the same death benefit costs $800 to $1,200 a month. Buy the term for $40 and invest the $760 difference monthly in an S&P 500 index fund at ~10%. After 30 years, you have approximately $1.7M in the brokerage account plus 30 years of life coverage. The whole life policy’s cash value typically lands well under $700K.
Letting an agent sell you whole life as an ‘investment’. The internal returns are usually 2% to 4%, after surrender charges, fees, and the cost of insurance. Buy term, invest the difference yourself. It’s the right answer for the vast majority of households.
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