It's often been stated that term life insurance is much less expensive than whole life insurance. Here, we examine absolute, opportunity, and net costs relative to purchasing whole life insurance or term life insurance. This article does not address the 'need' issue nor the 'unexpected - what if's' that most life insurance agents often discuss. We look more from an analytical perspective.

Term life insurance can typically be purchased on an annual renewable basis, what is commonly referred to as Annual Renewable Term (ART), or on a 10, 20, or 30 year level period basis where the premium is guaranteed by the insurance company to not increase for the stated guarantee period. When purchasing term life insurance, the consumer is making an assumption that they will not need life insurance beyond the guarantee period they select.

Whole life insurance is designed and priced to be in existence when the insured dies. Whole life insurance can typically be purchased by paying every year over the insured's lifetime or on a 'paid up' basis. Typical formats of 'paid up' premium structure are 10 years, 20 years, age 65, paid up at age 95, 99, 100, 121, etc. The shorter the pay period, the higher the premium, however the cash values that whole life policies typically generate will be greater (all other variables being equal).

For purposes of this comparison, we'll compare typical premiums of a 20 year level term policy with a lifetime pay, 'paid up' at age 100 whole life insurance policy. Assume both premium structures from highly rated insurance companies. Obviously, premium rates will differ among age, face amount and health status, however the premium ratios don't change that much.

Term Cost
Let's assume the term cost is $2500 annually for 20 years. The policy holder pays $25,000 over 10 years and $50,000 over 20 years. In any year, the policy owner may cancel the contract, but will receive nothing back from the company. Each year the policy owner pays $2500 out-of-pocket. It's an absolute and net expense.

Whole Life Cost
A comparable whole life insurance policy will typically cost 2-3 times more than the term cost, putting the whole life premium at approximately $6,000 for the same amount of coverage. The policy owner will pay $60,000 over 10 years and $120,000 over 20 years. However in order to accurately compare the 2 options, one must take into account both the guaranteed and non-guaranteed cash values that competitive whole life insurance contracts generate. After 10 years of paying $6,000 annually, a competitive whole life insurance contract will have approximately $45,000 of cash value. If the policy owner were to cancel at this point, they'd receive back the $45,000 of value for an approximate net cost of $15,000 which is less than the net term cost for the same period of time. After 20 years, the cash value account will typically have $130,000-$150,000 of cash value creating a negative net cost....a gain.

Opportunity Cost
There is the opportunity cost of the difference in premiums that should be considered. In the above example, the whole life contract represents $4,500 of annual opportunity cost. What could the owner of the term policy do every year with that $4,500? To make an accurate comparison, we assume the term policy owner would save or invest these dollars. The challenge with this assumption is what are the investments, what rate of return can/should be assumed, and will the owner actually have the discipline to save these dollars? In my 20 years in the business, I have yet to see an insurance buyer save 'the difference'. The money gets spent or consumed.

Is Whole Life Free?
If a consumer has 2 accounts; account 'A' is a bank account, and account 'B' is an investment account, and he transfers $6,000 from account A to account B, did the consumer 'spend' any money? Most would agree the answer is no. When reviewing a whole life illustration (projection of values) more closely, usually around the 5 year of the policy we notice contract actually paying for itself. If, for example, in year 5 the cash value account is estimated to be $15,000, and in the 6th year the cash value account is estimated to be $21,500, then the cash value account grew by more than the $6,000 premium. In essence, the policy owner, simply transferred $6,000 from his pocket (checking account) or 'account A' to the insurance account - 'account B'. Yet, in this example, account B actually grew by $500. With most competitive whole life insurance policies from reputable companies, you will usually find this phenomenon.

In conclusion, after about 4-5 years, most good whole life contracts will pay for themselves on an annual basis and after 10 years and beyond, the net cost will be lower than their term counterparts. Given time, one could make a legitimate argument that whole life is less expensive than term life.