All Life Insurance Tips

Why are universal life and whole life insurance policies more costly than term insurance policies?

Public Comments

1. you get money back with whole life
2. It depends upon what you mean by "more expensive", actually. The premiums you pay are higher, but that's mostly because in addition to paying for the actual insurance, you are also paying into a kind of tax-sheltered savings or investment account that builds up "cash value" -- so you're doing two things with your money when you pay premiums. The actual monthly "cost of insurance" in a permanent insurance policy is a different number, which is deducted from the cash value each month, and that's what equates to the premium on a term policy. This cost is probably higher than the premium of a term policy; I think that's simply because there is less cutthroat competition among permanent insurance providers, and cost-of-insurance is an obscure number that most people don't understand.
3. Term policies end at 65. You might be able to convert them, but they end at 65. Most people kick the bucket after 65. :)
4. Universal life and whole life are permanent life insurance, that is, they insure the policyholder until death. With permanent life insurance, the insurer will definitely pay a death benefit. With term life, there is a very good chance the insurance company will not pay a death benefit, because the policyholder very well might outlive the term of coverage. In fact, the insurer is “betting” that they do. Since the payment of a death benefit is not guaranteed, the cost of term life is much lower. The problem with term life is that people may find that they actually have a need for life insurance even after children are grown and off on their own. For example, the spouse who was able to be self-sufficient when the term policy was taken out might have become disabled in the intervening years and unable to support himself or herself. A person seeking a new term life policy later in life will definitely pay much more and might find himself or herself uninsurable, if he or she has serious health problems. The risk of uninsurability later in life is a major reason for getting whole or universal life insurance.
5. The main reason is that universal life and whole life builds cash value. When you make payments to them, your premium is paid for two things: The life insurance itself and the cash value. If they didn't build cash value, then whole life insurance would be called Level Term Insurance to Age 100 and Universal Life would be called Annual Renewable Term until Age 100. What is cash value? Cash value is savings in a life insurance policy. However, they do not act like savings in bank accounts. In life insurance, if you wanted to take money out, you have to borrow it and pay loan interest on it. Thats like you going to a bank and you take money out, but the bank is going to charge you interest on the withdrawal until you put it back. When you die someday, the cash value in your life policy is kept by the insurance company. Why? Cash value belongs to the insurance company until you surrender your life insurance policy. If you do surrender, you would lose coverage and surrender charges and other fees will apply when you surrender the policy. Term insurance doesn't have any of this nonsense because it doesn't build cash value. That's why its cheaper. No cash value = no extra premium payments, no borrowing, no surrender fees, no other management fees. This enables you to save and manage your money on where you see fit, whether its in a bank account or mutual funds. Majority of term policies provides guaranteed insurability until age 95 to age 100. That means, at the end of the term, you can renew your term policy without having to provide proof of insurability.