Term and Whole Life Insurance

welcome back to whiteboard finance my name is Marco and I’m here to help you master your money and build your wealth in this video we’re gonna talk about the differences between term life insurance and whole life insurance so insurance is one of those things in life that’s pretty much necessary because well life happens I could finish recording this video right now go for a bike ride and get hit by a car and that’s that whiteboard finance is over even though I’d like to think that my audience would create a you know Facebook memorial page and you know share my videos into eternity but we all know that probably wouldn’t happen so the fact is is that we’re all eventually gonna need life insurance at one point or another all throughout our lives so in this video I’m gonna go over the differences between term and whole life insurance before I get into that however I’m actually excited to announce that I did decide to make this a sponsored video today’s sponsor is simply safe it’s an 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time here you are then paid the benefit of whatever the policy is so if the policy is worth let’s call it $500,000 you croak within these twenty to thirty years of whatever the policy is your beneficiaries it’s usually your spouse or your children or whoever you sign as the beneficiaries will get this payout period so the nice thing about term life insurance is that it’s very affordable okay it’s actually much more affordable than whole life so typically this works out to be for every seven dollars in term life insurance for let’s call it a 20-year coverage period you’re probably going to be paying closer to a hundred dollars in whole life insurance for a 20-year period okay that’s just how the premiums shake out and I’ll get into that more in depth later so term life insurance has no cash value okay so you’re not paying into any premiums you’re not investing any money so as mentioned before let’s use that $500,000 as an example you pay a set amount per month let’s just call it I don’t know 20 bucks for that it’s probably a little bit more but you pay 20 30 bucks per month you get this amount of coverage whatever that coverage is and that’s it you’re not building anything you’re not investing that money you’re not making any interest on that money think of it like car insurance you’re just paying a set amount per month so you get a certain amount of coverage okay so this is actually not worth anything until you actually need it okay but that’s actually the whole point of insurance so that’s not necessarily a bad thing so the pros that come with term life insurance is that it’s a great choice for people that are looking to how do I say this replace their income so let’s say income replacement okay so if you’re someone who has a family of four and you’re making fifty grand a year you should typically and have something that covers about 10 to 12 times your annual salary so in the event of your death your spouse or whoever your beneficiary is can take that lump sum invest it in the market and hopefully live off the interest that would have been paid to you as your salary okay so this is also good for debt payoff and what I mean by that is that the premiums are much lower than whole life insurance so you can actually use this to put down towards debt and pay off your debts and get out of debt okay and then finally this doesn’t apply to most people watching this video but business policies term life insurance is great so if you have like a key person that’s within an organization they passed away the organization or whoever the beneficiary is will realize that insurance policy so let’s talk about the cons of term life insurance so this is one of the biggest ones it’s costly to renew the reason for that is if you use the example of the 30 year old that gets a 30 year policy he still needs it say like he’s still in bet or whatever his finances are in an order and he still needs to work if he goes to renew this policy at sixty years old it’s obviously gonna be a lot more expensive than when he was 30 when you’re 30 you have a lot more life to live you’re generally healthier there’s less health risks when you get older obviously you have less time to live meaning the policy has a higher chance of being paid out which means that the numbers have to work for the insurance company so that was the cons of term life insurance let’s get into whole life insurance so what is whole life insurance so whole life has three components that we need to talk about and this is what differentiates it from term the first one are the premiums that you pay so there’s both premiums obviously in the term that was the $7 versus the 100 so there has to be a reason why the hole is so much more why is it a hundred so the premiums are the first component the second is the death benefit okay this is just what it sounds like this is the amount that you’re paid upon your death so let’s just call it 500 grand for easy numbers and then finally this is the kicker this is what differentiates hole versus term and that’s the cash value of and I’ll put a dollar sign here so the cash value is pretty much what gets accumulated and what these salespeople the sales agents or the insurance agents try and sell you on it’s kind of like the savings component or the investment component of a whole life cash value policy okay so when you pay your premium the money that you pay remember this seven and hundred bucks a month obviously a big part of that is going towards actually funding the death benefit for like the first five to ten years okay also where these premiums are going in the beginning they’re not going towards your cash value which you’re led to believe a very small amount is going towards the cash value the majority of these premiums are going towards the commissions of the salesperson so that’s why they always try and push whole versus term they’re also going to the administrative fees of actually running the policy and they’re also going like I said to actually fuel or fund the death benefit okay so you’re led to believe that oh if you have a cash value whole life insurance policy you’re gonna make ten eleven percent in the market it’s gonna grow and it’s gonna be tech Stafford and that’s gonna be your money right well actually that’s incorrect after all the fees and all that stuff is said and done you’re typically averaging one point five percent on a whole life policy okay let me repeat that one point five percent to two point two percent after you’ve paid into this death benefit for like five to ten years that cash value starts to build more and more based off the premiums that you’re funding it with okay so beneficiaries here’s the big kicker beneficiaries are only entitled to the death benefit when you pass away okay when you pass away the cash value that you’ve built up this whole time that’s the whole thing that you’ve been being sold on this whole time goes away okay this gets absorbed by the life insurance company believe it or not this does not go to your beneficiaries okay so if you have a $500,000 policy that goes to your beneficiaries okay the cash value does not that goes back to the insurance company so all this money that you saved there’s a ninety three dollar difference between the seven and the hundred that ninety three dollar difference that you’ve been saving month after month after month after month it does not go to your beneficiaries it goes back to whoever your provider is okay the other thing is with whole life insurance you have no choice in how the life insurance company applies the premium okay so when we talked about the premium for the first five ten years going towards a majority of the death benefit the Commission’s and the fees you can’t choose what percentage that goes to the cash value it’s basically whatever their policy says and whatever those underwriters and analysts have decided so the thing is you can actually the only way to get this money right here the cash value is to cancel the policy and surrender your policy so you lose the death benefit and then they’ll cut you a check for whatever that cash value was so you’re losing your insurance that’s the whole point of getting insurance just to get your money back that grew at a very poor rate that one point five to two point two percent so it sounds like I’ve been talking smack about the whole life policy there are a couple different benefits here that cash value portion is non-taxable as long as it doesn’t exceed the total premiums that you paid okay so if you paid let’s just call it hundred grand in premiums as long as this cash value isn’t above 100 grand it’s not taxable anything above that hundred grand is taxable okay so very quickly let’s just go over a quick recap of the pros of the whole life insurance and then we’ll do a quick recap of the cons and then I’ll get into a dollar comparison if you will so the pros of the whole life insurance is that you have coverage for life it’s not set to that twenty thirty years like we talked about in the term policy okay this is covered until the day you die right they can do that because again your family members aren’t getting that cash value when you pass away that goes back to the insurance company so the other thing is is that the premiums are guaranteed and also the cash value is non-taxable and you can actually borrow against that cash value if you want to so we talked about the non taxable unless it exceeds that amount borrowing against it so I’ve actually watched Dave Ramsey talk about this years ago it’s kind of funny borrowing against your cash value policy is like going to a payday lender of the middle-class so if your cash value policy is like let’s call it 50 grand if you borrow against that to take out money you have to pay a percentage on the money you’re basically going to a loan shark okay you’re paying a percentage on your own money does that make sense you’ve saved and saved and saved and contributed that fat premium every month now if you want to take out money against this you have to pay a percentage to borrow your own money does that make sense so let’s get into some of the cons of the whole life insurance some of the cons are that it’s obviously very expensive okay so if this was a restaurant I’d give it for dollar signs next is that it’s very inflexible again we talked about those premiums not being able to choose where they go again it’s covering Commission’s fees all that stuff I just typed in all right just wrote premia s– premiums next is the cash value accumulation is slow remember the first five to ten years it’s going towards the death benefit it’s not going towards the cash value and then finally the big kicker that I’ve mentioned a couple times now is that the cash does not go to your family so draw a little family here it goes back it’s absorbed back by the insurance company okay so the whole thing with life insurance is that it’s expensive and it’s probably one of the worst financial products out there in my humble opinion okay because it’s not doing what it’s supposed to do it’s not supposed to be an investment product it’s supposed to be an insurance product you don’t go to your car insurance and say hey I’ll pay you more premium if you get me back 1.5 percent over 20 30 40 50 years that would be stupid so let’s move on to a cost comparison example here very quickly so say we have a 31 year old guy that has $100 a month budget to spend on insurance okay so he can get 125 grand in term he can get 125 grand in whole this one is gonna cost them 7 bucks a month this one’s gonna cost them $100 a month if you just did a simple investment calculation okay let’s just say we’re getting 8% in the market over 20 years because that’s what this term policy is going to be for you’re gonna end up with two completely different numbers this 93 dollars the difference between the hundred and the seven okay so 93 dollars at 8% over 20 years would get you I believe it’s fifty two thousand nine hundred and seventeen dollars in the market over 20 years this if you want to invest at like one and a half percent which is what whole policies typically return one and a half to two point two percent after fees commissions you know inflation all that stuff you’re gonna end up with typically twenty five thousand nine hundred and eighty-three dollars okay so it’s a big difference that’s basically a twenty eight thousand dollar difference so with all that being said I hope that this was just a good primer there’s obviously different policies different companies different coverage amounts all that stuff that needs to be taken as a consideration I’m not talking about health age things like that I just want to give you the big open facts about the difference between whole life insurance and term life insurance so I hope this video was valuable for you in the middle class I’m definitely gonna be getting term life insurance once I grow a family there’s really no reason for me to get it right now at this point even though like I said I could get hit by a bus right now but if you got value out of this video share it with one friend give the video a like and please subscribe if you haven’t already thank you so much and have a prosperous day.