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A quick look at whole life insurance

The cost of guaranteeing a risk

The name of this site is etermlifeinsurancequote.com for a reason...term is the most affordable way to insure against the risks that accompany someone passing away early.  This begs the question...what about the main alternative, whole life insurance?  That's a good question and it's really the first question to answer in order to make an informed decision.  Let's look a little closer at how whole life insurance works (and doesn't).

Whole life is exactly what it says.  The protection of whole life will continue as long as the premium is paid (whether by you or by the policies cash value/dividend).  You are protecting the insured for his/her entire lifetime.  Suffice it to say, whole life policies always pay out.  There will always be a benefit paid regardless of whether a person passes away tomorrow or at age 90.   To many people, this a reassuring thought and addresses the most common misunderstanding of insurance..."What if don't pass away during the period of term life I purchased and I paid all that money?".  This is akin to the "What if I never get sick" argument with health insurance and it shows a critical misunderstanding of how insurance works and our views of risk and probability.  Read that last sentence over and the let's look at how the life insurance companies came up with a way to satisfy this basic fear much to their financial benefit...whole life insurance.

So you're now a life insurance executive in charge of new plans for the company.  There's plenty of jokes I can enter here but it's too easy so we'll move on.   People in marketing are telling you about this strange fact that people like to get something for money they pay and a lot of the population doesn't purchase life insurance because they very well may not get anything.  Even though those people know the risk of going without, they can't get past paying money now for some possible benefit in the future.  There's a disconnect.  Voila...whole life insurance.  You pitch it to the company and they think you're crazy.  "We can't insure against a risk that has a 100% chance of happening...we'll either have to charge the full amount (plus profit, overhead, inflation, etc) or go broke!"  Well, let's just say the carrier didn't go broke by selling whole life insurance.  In fact, it's one of their most profitable types of insurance and life insurance brokers are pretty excited to show you whole life as well.  Perhaps they just all feel it's a better product or maybe they understand that some people will go without life insurance all together if there isn't something more tangible for the money they pay.  You may agree with this but understand that you are paying significantly to do so. 

How does the company 1) offer whole life considering the fact they will have to pay out and 2) attract people to purchase whole life due to the cost resulting from item 1?   To answer question #1, the carrier has to charge considerably more money to offer whole life.  You can think of it this way.  Let's look at $100K benefit.  One way to think of it is that they will charge you $100K plus a certain percentage to cover profit, overhead, inflation, cash value (we'll discuss later) over your statistically expected remaining years.  That's a lot of money you have to pay and this is the reason whole life is so much more expensive than term.  To some extent, you're paying a dollar to get a dollar (actually less than). 

As to question 2, how does the carrier attract people to buy this much more expensive life insurance policy?  The first way goes to the disconnect that caused the company to create whole life in the beginning.  The guarantee of a benefit.  "Why would you pay money and get nothing in return with term" is likely the pitch.  But they need more to "sweeten" the deal.  What if your policy builds up a cash value that you own.  We'll take some of the extra premium and give it back to you over the course of the policy.  At some point, the cash value and/or dividends can even pay the premium of the policy.  Now, people are satisfied.  Yes, they are paying a lot more but they will get some of back.  The problem is that they will get a lot less of it back than they pay relative to the cost of term life.  

If you're absolutely adamant about the "whole life" length of protection for whole life, then by all means.  We can help you in this regard.  We just think it's important to get an impartial understanding of what you are paying for.  Insurance, at it's core, is about insuring the probability of a risk.  Anything that strays from this framework quickly approaches something else and usually at your expense.



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