“Do I buy term insurance and save the difference or do I buy whole life insurance?” That seems to be the million dollar question these days. This is a great question which I feel is of great importance. Let’s take a 40 year old male non-smoker in good health and compare the two scenarios over a 30 year period. We’ll assume that the said client is in need of a $500,000 policy and that he is in the 25% income tax bracket.

Term Scenario:
-Premium: $656.88 annually for 20 years
-Contribution to savings per year: $7,250
-Earnings: 6% annually (taxable)

Whole Life Scenario:
-Premium: $7,913.00 annually
-Earnings: Between 4-6% annually (tax free)

Just to clarify, both of these policies contain a rider on them called waiver of premium, which means that if you were to become disabled the premium would be paid by the insurance company. The whole life policy contains paid up additions, which means that you are purchasing additional chunks of death benefit in addition to the original death benefit with your dividend income. The premiums are going to be a little different from insurance company to insurance company, but we’ll work with these rates as they are from one of the companies I represent. We’ll start with the term scenario. The results will include after tax figures.

At 10 years:
-Saved: $93,099
-Death Benefit: $500,000

At 20 years:
-Saved: $237,678
-Death Benefit: $0 (Policy ended)

At 30 years:
-Saved: $470,642
-Death Benefit $0

Now let’s look at the whole life scenario.

At 10 years:
-Cash Value: $65,295
-Death Benefit: $542,773

At 20 years:
-Cash Value: $238,858
-Death Benefit: $711,333

At 30 years:
-Cash Value: $516,249
-Death Benefit: $947,573

Let’s analyze these two scenarios. After 10 years you will have accumulated more money in your savings than the whole life policy had accumulated, however, your death benefit has increased by just under $43,000 to $542,773, while the term policy remains the same. After 20 years things begin to get more interesting. While the savings amount and the cash value are relatively close in amount, you’ll notice that the death benefit has gone to zero. This is due to the fact that the policy had ended after the 20 year period, while the whole life policy’s death benefit has grown substantially. The same situation is apparent in the 30 year scenario. The point is, not only do you have a nice cash value in your whole life policy, but you also have a death benefit of just under $950,000.

The proof is in the pudding my friends. Is term insurance a bad investment? Not at all. Many people simply don’t own whole life insurance because it is expensive. Term is much more affordable, and ideal for younger individuals or people that don’t have the income to spare. You always have the option of converting your term policy to a whole life policy when the income is available to do so. Until then, get yourself a good term insurance policy that will keep you and your family protected.