Which is Better: Term or Whole Life Insurance?

I’m often asked which is better — term life insurance, or permanent cash value life insurance?

The answer is, it all depends on what you want it for. Think of term life insurance and permanent cash value life insurance as tools designed to solve a particular problem. In some cases term life insurance is better than permanent cash value life insurance. However, in most cases permanent cash value life insurance is better for physicians than term insurance.

So what’s the difference? Term insurance is temporary insurance. It lasts for a period of time or “term”, typically 10, 20, or 30 years. At the end of the term it expires and you have nothing to show for all the money you paid over the years. Its main purpose is to provide financial protection from a liability that is expected to eventually end. For example: If you had a business loan and the debt would be paid off in 10 years, you would want a 10-year term life insurance policy to cover the debt. Term insurance can also provide for a high dollar amount of coverage for a relatively low cost.

Permanent cash value life insurance is just as it sounds. It can be designed to last your entire life and it also builds a cash value. A suitable, properly structured, and permanent cash value life insurance policy will always pay out more money than is paid into the policy. This means that even though it appears to cost more money than term insurance, in the long run, permanent cash value life insurance is a much better value.

The downside of term life insurance is it only pays if the insured dies. The exception being the new term policies that have critical and chronic illness riders. These policies also pay a benefit if the insured suffers a covered critical or chronic illness. If the insured outlives the policy and does not suffer a critical or chronic illness, term polices end up costing a lot of money. For example a 20-year term life insurance policy with a small monthly premium of only $100 per month, actually costs $24,000 over the term of the policy.

The downside of a permanent cash value life insurance policy is that it takes more cash flow to pay for it. To overcome the problem of cash flow, you can start a retirement pension plan using a permanent cash value life insurance policy as the retirement savings vehicle. This way your retirement dollars are working “Double Duty”, and provide you with both a lifetime tax-free pension plan and life insurance benefits. Think of it as putting your money to work for you and making your money work very, very hard.

If you have questions send me an email to David@theAlemianFile.com. Check out my website PhysiciansRetirementPlan.com. Make sure you come back here next week to Physicians Money Digest for another edition of The Alemian File.