The Pros & Cons of Whole Life Insurance
What are the Advantages & Disadvantages of Permanent Life Insurance?
Nov 9, 2009
The most commonly used alternative to term life coverage is whole life insurance. Choosing between these two options is an important initial decision to make. What are the pros and cons of a permanent life policy?
What are the Advantages of Whole Life Insurance?
Each type of insurance policy will come with some benefits and some downsides. The benefits of a permanent life policy include:
- Guaranteed payments: A term life policy will only give any payment benefits if the policyholder dies when the insurance is in place. Once it reaches the end of its term, they have no life coverage. A whole life option, however, guarantees a payment on death and lasts for life.
- Return on investment: A term life policy may see the policyholder pay premiums for many years but, if they survive their policy, they may see no return on investment (unless they have a return of premium product). Permanent products may, on the other hand, come with an investment element that could give tax deferred savings, cash surrender value and/or investment funds over and above the insured sum.
- Need: Some people like term products because they can be set up to end at a time of life when insurance may not be needed as much (i.e. when the kids are grown and the mortgage repaid). Others have different needs, however, and may need financial support in place for longer periods or for life.
It is, however, important to look at both sides before deciding if this kind of life insurance is the right one.
What are the Disadvantages of Whole Life Insurance
There are some disadvantages to permanent life insurance that may also be worth considering. These include:
- Cost: A whole life policy is likely to cost more than a term product. The guaranteed payment plus increased coverage costs later in life are likely to make this a more expensive option from day one.
- Return on investment: There is a body of thought that the investment vehicles used in many permanent policies shouldn't be treated as investing products above all others. Some may find that taking out a term product and investing the difference themselves over the years may give better returns than a whole life policy which may also have to factor in policy management fees and costs.
- Need: If the individual doesn't actually need a policy for life then paying for permanent cover may be a waste of money.
It may be worth taking some time to compare whole life insurance with term insurance before making a final decision on policy type. If permanent insurance is the final choice then further investigation into the options on offer may also be worthwhile.
Source: The Insurance Information Institute; www.bankrate.com
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