In exploring the differences between term life insurance and whole life insurance, we examine commonly held myths about the matter. Due to the talking heads on TV and financial magazines (largely sponsored by the mutual fund industry), the popular belief is that term life insurance is cheaper than whole life insurance (or permanent life insurance.)
It’s true that term life insurance requires a smaller payment, but those smaller payments build no equity for the policy owner. If the insured doesn’t die, the insurance company keeps every payment. Conversely, when making higher payments into a permanent policy (whole life or universal life), those payments actually can build substantial equity for the policy owner. That equity can be easily accessed and enjoyed (at any time for any reason) even while the insured is still living.
The difference between term life insurance and whole life insurance is best understood using the analogy of renting or buying real estate. This video uses this analogy to understand the dynamics of term life and permanent life insurance in terms of their payment structure, growth of equity, tax advantages, and access to equity. The video also discusses convertible term which allows the policy owner to exchange their term life policy for a permanent life product at any time during the length of the term.