Term and Whole Life The difference between term and whole life insurance
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- Let’s say I’m forty years old
- I'm married
- I have two children
- and I’m the main income earner for my family
- so I earn most of the income for my family
- And we also have a mortgage
- And I’m hoping that my kids go to college and that I will be able to pay for college
- And I also want to make sure that my spouse if anything were ever happened.
- Can retire
- Cause maybe my spouse, does not have the income generating ability or maybe
- maybe you know even
- If here she does ...They would have to a large degree have to take care of the children if anything were to happen to me
- So because of all of these things that I want to make sure. Get paid off or get funded
- In the event that I die... I think about getting a life insurance
- Uhh think about getting life insurance
- I think most of us understand the general idea about life insurance
- You pay certain amount on regular basis
- and in the event that you were to die your relations wherever you uhh whoever you put as the beneficiaries
- of your life insurance policy
- And those people we'll get some money
- but life insurance isn't quite that simple
- In one version of live insurance is ... the other one is less simple
- So there's two types of life insurance
- One is: term life insurance
- and the other is whole life insurance....whole
- I will talk about term because frankly: term life insurance is simpler.
- So I go to the insurance agent and the insurance agent says
- look if you pay a premium
- if you pay a premium
- every year of five hundred dollars of the ....
- the word premium litterally just means the amount that you would pay every year
- If you pay a premium of five hundred dollars every year for ten years
- so the term here is ten years
- ten years
- if you are to die at any point over dose ten years we will give you
- We will give you five hundred thousand dollars... I guess it's
- more exactly we will give your family, or we will give the beneficiaries of your policy
- five hundred thousand dollars.
- the beneficiaries are the people who would benefit from your policy who would get the payout
- If ... In the event that you were to die
- over the next ten years You will pay about five thousand dollars if you were to die your family will get 500 000 dollars
- and the reason why this works out for the insurance company is that
- the insurance company figures it out … ok if you don’t smoke, you have good health
- It’s unlikely that you’re going to die in the next ten years and so
- if the average over many many thousands of people, they’re going to make money.
- Some people are going to randomly die but they were gonna to get premium from everyone else.
- And that’s going to more than offset the payoffs that they need to give for the people
- who are just randomly ran accident or who die for whatever reason
- The reason why this is called term life is that
- if you don’t die after those ten years
- You have to then get a new insurance policy
- if you don’t get a new insurance policy
- After those ten years that you didn’t die, nothing really happens
- you just keep on living
- All of these money that you have put it in, kind of goes away
- just goes to insurance company you gave it to them
- in the event that you might have died in those ten years.
- You didn’t. All is fine now
- What’s unfortunate, well this is probably good enough for you
- because ten years you know for … forty to fifty years old.
- Maybe that’s the time your kids can start go to college
- but not give you enough time to save more money for retirement or
- to give you time to pay off more of the mortgage and maybe save up some more money for college..
- hey ten years was perfect for me
- if you think when you’re forty years old and [hey] I want more time
- I want more time to
- uhh pay off the mortgage
- uhh save money for college
- save money for retirement
- than you can make this a twenty-year policy
- then you could make this a twenty-year policy
- and if you make this 20year than .. your premium is going to be a little bit higher.
- You’re gonna pay every year
- but the reason why this premium is going to be a little bit higher is that you have a higher chance of dying from ages,
- from ages
- uhh ffifty to sixty than you did for ages forty to fifty. So the insurance company will figure out those probabilities
- and charge you slightly more a larger amount
- but regardless anyway you look like, anyway you look at it…
- at a term policy fade fix premium for fixed term.
- If you pass away over that term, your family gets the payoff, if they,
- if you don’t … then the policy just expires
- and you have to get another term life policy
- and at some point maybe by the time that you’re seventy years old and if you haven’t...
- if you haven’t passed away and hopefully you haven’t
- it’s actually very hard to get term life policy when you’re 70 because
- insurance companies would say that you have high probability of passing away between the age of seventy and eighty
- and we don’t want to take that risk
- so term life is really good if you feel that there’s a set amount in your life
- where you just want to make sure im around for the next ten or twenty years to
- take care of a lot of obligations if anything were to happen.
- then my family can use the payoff from the policy to take care of these obligations for themselves
- and this is actually what I have. I have a term life policy cause I am
- I am right now thirty four years old and
- I have mortgage and I have young child and I want to make sure that if anything were to happen to me over the next...
- I believe my policy term is the twenty years
- If … were to happen over the next twenty years
- that my family will get enough money that to pay off the mortgage and have money for college and that maybe some money for my wife’s retirement
- The other type of policies is whole life
- and whole life is the motivation for whole life policies.
- Comes from the idea that people did not like the id...
- people did not like this notion
- That you pay money in a term life policy year after year after year
- but if you don’t die which is frankly good thing, but if you don’t die
- then all that money just went, went for nothing You don’t get it back..
- .. you didn’t save it in any way or anything like that
- And another issue is
- Is that term life is only valid for a certain term.
- 10 years, 20 years whatever it might be. Some people want the idea that [hey] I wanna keep gaining a premium my entire life
- and when I die, and all we know all of us will die.
- when I die there will be a payoff so... uhhh
- if I'm forty years old, I might be paying that premium for the next forty years
- but what If I’m eighty and I pass away at my eighty
- then my family will still get something for all of this insurance that I paid.
- So whole life can kind of appeal to all of these notions that
- that you’re saving some of these premium but your family definitely will get a payoff
- but the insurance company aren't silly people. They're very ughh scrutinize probabilities.
- They want to make sure
- that it’s a profitable thing for them
- so really what they do is a whole life policy... is it that they charge you more so that you get a lot of what’s kind of in the term life policy.
- a lot of the insurance aspects of it
- and you also get at saving part but they charge you a lot for that
- for that ... so it comes out to be a good deal for them.
- so the whole life policy for the same forty-years old.
- and I'm just making up the same numbers, you should contact it in insurance agents if you want more accurate numbers.
- your premium
- your premium let’s say … it’s also for five hundred thousand dollar pay off.
- Your premium in the situation could be a lot higher than in the term life policy
- so it could be maybe it is five thousand dollars. Five thousand dollars per year
- and the term is your whole life
- the term .... so there’s no term.
- I shouldn’t even write term cause is no term, it’s your whole life
- That’s the name of the policy, and if you were to die.
- At any points we’ll just keep paying this policy until you die and then your family will get the pay off
- will get the five. so upon death...
- the beneficiares are the people, who will benefit from you policy. Will get $500 000
- so you might be say where this is a complete rip off. I'm paying ten times more
- but the same it’s the same death benefit
- and there is a couple things to think about why it’s not quite that much of a rip off.
- Being always a little bit more less financially savvy than the term life is that…
- this is going to this
- as long as you continue to pay this premium this is guarantee,
- cause you will die one day unless you know something the rest of us don’t know.
- You will die some day so
- In the term life case once you become sixty or seventy
- and insurance companies charge you a lot higher of premium to insure you for this amount,
- because they think there is a high probability that they would have to pay it off.
- In the whole live
- You pay the same.. I would call it very high premium your entire life and so earlier on in your life
- when you’re thirty or forty or fifty. This premium is definitely going to be higher than a term life premium
- But maybe when you become seventy
- if you were seventy years old and you were asked for term life policy what you might not even be able to get one or
- if you if you were able to get one their will charge you huge premium. Maybe it would be 6 000 dollars a year or
- maybe it will be 10 000 dollars a year and at that point here this would be a little bit cheaper
- the other thing that the whole life policy does for you is that the insurance companies implicitly setting aside some of this money to just purely insure you life,
- but they’re also setting aside some of this money
- so there’s some kind of putting it aside as cash
- and that cash does build up over time not all of your premium goes into this cash,
- but some of your premium does.
- Early on the first year premium using of that kind of just goes to the insurance company
- And that every year a fraction of your premium does go into a kind of savings account within the insurance company
- and you get so let me call it: cash savings
- where you can get interest.. get interest while… it is with the insurance company is getting interest on a tax- deferred basis
- So someone try to sell you whole life and say hey this is a good deal
- you pay a premium, you’re guaranteed this premium, you’re whole life you will and you family will eventually get the death benefit as long as you continue to pay the premium and
- rebuildling up this cash savings for you
- at some point you decide.. hey look all of these risks are there for my family anymore
- I don’t wanna pay this premium anymore
- Maybe you’re sixty five years old.
- You’ve paid off your mortgage. You’ve saved up bunch of money and you say…. look I'm going to stop paying this
- when I’m sixty five so this will kind of go out of the picture but then you can get the cash payout
- so all of this extra cash in interest you will be able to get that for yourself what
- they won’t tell you until you feel good about it, it’s like a lot like life insurance it’s like savings at the same time
- what they might not clarify as much is that they’re taking huge fees on this cash savings
- So you probably would have been back definitely would have been better off
- and if this was your point if you wanted to save some
- and stil have life insurance for a fixed amount of time. Until you were able to take care of these obligations,
- you probably would have been better off, paying by a term life policy and paying this lower premium
- And then taking the difference if this really is the difference, I just made up these numbers for simplicity,
- but taking the difference maybe the difference is forty five hundred dollars each year and
- putting this into a savings account or investing it Or putting it in a mutual fund whatever you do.
- It’s overtime, over the terms party, that you will probably save more money and get more interest doing this
- Because you won't be implicitly paying all of these fees to the insurance company.
- I just realized that I didn’t answer a question that might be burning in your brain
- because in whole life we talk about the scenario
- Where you can pay this premium your whole entire life and in the event and
- you can just all the way until the day you die,
- so that when you die your family will definitely get the pay off.
- They will get $500k upon your death.
- And we also talked about the scenario where any time before that you decide that I don’t need life insurance anymore,
- you can stop paying your premium.
- You’re family wont get the death benefit in the event that you die
- but you would get cash payout or whatever is left after the insurance company has taken their fees
- and set side for the insurance component of what they’re selling you,
- but the question you might ask –
- is what happens to the cash amount?
- Because before you die you can cash it out,
- if you die, you definitely get the payoff, but what happens to the cash amount.
- And the answer is you don’t get it.
- you don't get it!
- It's kind of viewed as what’s backing up your death benefit and
- what’s kind of unfortunate if for whatever reason this cash amount is even larger than the death benefit.
- Maybe you know, you live unusually long amount of time, you live fifty years and you’re paying or you live to 90s
- so you live fifty years from the day that you start the policy.
- So you pay two hundred fifty thousand dollars but you have to remember compound interest, you’re getting returnes on that year after year.
- Maybe this cash payout becomes six hundred thousand dollars when you accrue
- all the interests and everything else in it.
- Regardless of that fact, although this would be kind of silly thing for you to do.
- Regardless of that fact if you were to die your family would only get the five houndred thousand dollars.
- Which really makes you ask the question,
- if you know your cash payout is larger than the amount of that is going to be paid off when you die.
- Then the best thing to do is just stop paying premium and get the cash payout and give that to your family.
- While rather than waiting around to die.
- This is worse in two ways.
- One you die and in the second way you’re actually getting less money.
- But just answer your question, in the event of your death your family does not see the savings portion,
- they only get this payout right over here.
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