Wednesday, October 30, 2013

Term versus Whole Life Example

I've not written a single personal finance thought on this blog in 13 months, but I'm feeling the urge to get a little more deliberate with writing down some of my thoughts.  My recent perspective comes from being an "experienced contributor" in the Financial Peace University (FPU) class that our church is sponsoring this fall.

While the class size is small; we started with about 18 and are down to about 10; it has proved a great reminder of Dave Ramsey's basic concepts: the 7 Baby Steps.

The lesson we went through a couple weeks ago was on insurance and covered the difference between Term and Whole Life insurance.  We both have 20 year term policies that were purchased 2 years ago as healthy 30/33 year olds.  I was curious about the difference between the two types of policies, so found a plan comparison application on the State Farm website.  (First hit on a google search of "term versus whole life insurance".)

What I found was staggering and deserves some explanation:

For starters, I selected a $500,000 policy and am comparing a 20 year term versus whole life.


  • 20 years, for $32.20 per month ($370 per year, or $7,400 over 20 years)
  • level premium to age 100 (standard), $559.85 per month ($6,435 per year, or $128,700 over the same 20 years as above)
Okay, so for the price of almost 20 years of term coverage, you can get just over one year of the whole life?  Holy crap.  Who buys this stuff?

I get year 21 and year 31 and whatever, my rate never increases...who cares?  Right now, I can buy a new 20 year term, if I was 55 years old for only $163.55 per month!  Still nowhere close to the $559.85 per month.

Let's put some perspective to this.  Say you just love the idea of whole life insurance because "it's a savings plan too!"  What if you were to buy a 20 year term policy for half a million dollars for $32.20 per month.  But you were comparing it to the whole life, that you were paying, so you had ($559.85-$32.20 =) $527.65 a month to save and invest.  If you were to invest this over that same 20 year period in a low-cost index fund, assuming 7.5% return, you'd have $294,761.34.  If you don't put anything else in, after only 10 more years (less than halfway into your next 20 year term, or at the end of your new 10 year term, it would be worth $607,512.42 (theoretically increasing every year until you die).  By then you're self insured by this "additional premium" fund and no longer have a need for life insurance.  The best part is that you own this fund, and heir access to it isn't dependent on an insurance company writing a check or forcing your heirs to jump through hoops to get it.

I just don't see how a whole life policy is ever a good deal.  

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