It’s a debate that’s been raging for years. Which is better: term life insurance or whole life insurance to Create Generational Wealth ?
Most insurance experts would agree that for a short-term need, like protecting a mortgage or other type of loan, term life insurance meets that need perfectly. By design, a term life policy is a temporary life insurance policy because it only pays a death benefit if you die during the specified term.
Term life is also well-suited for younger adults who need a large death benefit for as low a premium as possible since they’ve not yet hit their stride financially. For example, a 25-year-old can buy a 20-year term life insurance policy with a $500,000 death benefit for under $20 per month.
While that’s a sizeable death benefit for a small premium, the chances that your family will ever receive a death benefit from a term life policy are very small. A term life insurance study conducted by Penn State University found that 99% of all term life insurance policies never pay a death benefit to anyone.
What makes whole life insurance preferable for creating generational wealth?
For several reasons, whole life insurance is much preferable to term life in creating generational wealth.
Whole life insurance builds cash value.
While part of your monthly premium for a whole life policy pays for the cost of the death benefit, a portion of it is deposited into the “cash value” side of the policy. That money accumulates over time by earning compound interest and, in many cases, dividends.
Over time, the policyowner can choose to use that cash value in several ways:
- Pay the policy’s premiums. Though it takes years for the cash value to build to the point where it is sufficient to pay premiums, the insurance continues in force until it pays a death benefit.
- Withdraw it. Whole life insurance allows you to withdraw a percentage of the cash value over the life of the policy. Though you may owe taxes on a portion of the withdrawal, it will not impact the death benefit amount.
- Take a policy loan. In addition to being withdrawn, the cash value can be borrowed without it being a taxable event. Any unpaid loan balances will be withdrawn from the policy’s death benefit when the insured dies.
These options are often called “living benefits” because you can realize the tangible benefits of your life insurance while alive and still be secure knowing your family will receive a death benefit.
Whole life insurance will ultimately pay a death benefit.
Whole life is aptly named because, unlike term insurance which only pays out if you die during the specified term, whole life will remain in force your “whole life” as long as you continue to pay your premiums.
The fact that your policy remains in force until you die guarantees that the heirs you select as beneficiaries will receive a tax-free cash payout, which can be passed down to their children or pay for your grandchildren’s education.
Whole life insurance can pay taxes due at your death.
Although few families are faced with “death taxes” due to the government when a loved one dies, it does happen. Whole life insurance can pay those taxes, so assets like a home or valuable collectibles don’t need to be sold to pay the tax bill.
Recession.org doesn’t sell either term or whole life insurance but is concerned with ensuring that your family receives the death benefit from the policy you’ve paid premiums for over the years. The facts are indisputable that while whole life insurance costs more than term insurance, its permanent benefits are perfect for creating and preserving generational wealth.