The Skeptics Guide to Term and Whole Life Policies

Insurance Choice

A perception realignment of Whole Life and Term Life Insurance policies

Whole Life – A policy for YOU

Whole Life policies provide more than merely a death benefit for your family. It is primarily a policy for YOU. A whole life policy has a cash value component in that your premiums don’t disappear but rather your premiums accrue value over time. There are obvious advantages of this type of policy because now YOU can borrow or withdraw funds as needed because your policy has a tangible value.

One of the greatest benefits of a whole life policy is what the accrual of the cash value can actually do for YOU. Because a whole life policy is not a “traditional” investment, it is not taxed as such. So what would prevent you from funneling almost all of your cash into this vehicle? The federal government that’s who! The SEC has placed a limit where your policy then is considered an investment.

A modified endowment contract (commonly referred to as a MEC) is a tax qualification of a life insurance policy which has been funded with more money than allowed under federal tax laws. A life insurance policy which becomes a MEC is no longer considered life insurance by the IRS, but instead it is considered a modified endowment contract.

The loophole in the MEC law is you can not be limited in how many policies you can fund. Even though they have set a limit on an individual policy, there is no limit to the amount of policies you can purchase.

Advantages

• You now have the ability to become your own banker by setting up multiple policies and borrowing from yourself
• You can borrow against these policies and pay it back to yourself with interest but it is tax free – a tax-free retirement policy that still has a death benefit.
• Your cash is essentially held in escrow, untouchable for years, by the provider while they invest that money and make a return. After 5-7 years, you are now in the black with real cash buying and loaning power.
• No term involved…so the policy never ends, unless you fail to pay premiums.

Disadvantages

• You have to have a lot of money to afford the premiums of more than one policy or for it to be advantageous to get you to the MIC limit.
• As an investment, this is out of reach for the normal person
• Unpaid loans and withdrawals will reduce the guaranteed death benefit and policy cash value. Loans accrue interest.

Term Life – A policy for YOUR HEIRS

With term life, you choose to pay your premiums over an allotted period of time, and in exchange, the insurer agrees to pay your beneficiaries as stated in the policy if you pass away within that time.

If you choose a term policy, you are smart enough to understand that Term Life insurance isn’t an investment vehicle for the majority of the population. If you can afford high premium then disregard that last sentence as it is smarter to opt for whole life IF you can snuggle up to the MEC limit and still afford the premiums. Term Life insurance is playing defense and nothing more. It is a catastrophic, care-for-your-family, not-stiff-you on the funeral policy.

Advantages

• Premiums are really cheap and most term policy premiums remain flat.
• If you pass within the term, your beneficiaries are paid the full death benefit as long as premiums have been paid.

Disadvantages

• Once your term is up, so is your death benefit. If you purchased a 20-year term and do not pass within that 20 years, your policy is done. You will have to purchase another policy and at a much higher price due to your much older age.
• No Cash Value because you were essentially renting a policy. So, you better have a traditional investment in place or you will have to rely on your family or government for retirement funds.