Which is better and why: term or whole life insurance?

 Look at the beauty of marketing by insurance companies. They can cherry pick words & make lousy products look beautiful. And these things sell also ! It is a wonder.

The difference between term insurance & whole life insurance is this :

One is Good , the other ranges from Bad to Ugly.

We shall come to the marketing later. Let us see this through the definitions first so that you get it in simple terms.

Term insurance is a fixed term contract between you & the company. So you enter into the policy at say 30 years & agree to pay a fixed premium per year for next 30 years (mostly flat per year).

Why do you pay ? If something unfortunate happens to you, your family gets the “sum assured” amount immediately on which they can sustain till the time the children become independent. Typical sum assured should be between 10 to 14 times your annual income. In mature markets like US, this multiple can be as high as 20 or 25% at very reasonable cost. So it’s simple. You pay for the risk of eventuality & know what your risk cover amount is. If you survive till 60, good for you. The contract ends. The policy gives you the peace of mind while you are earning without spending too much out of your savings(for premiums). That’s all you need for your dependents in your earning years. Right ? This is the GOOD product.

Now let's move to the whole life insurance also sold as permanent life insurance.

This is a category which has various forms (variable, universal and variable universal). It also takes the form of endowment plan, money back insurance, traditional plan, etc.

Notice the attractive use of catch phrases like “permanent” , “whole life” & “moneyback” v/s the very non glamourous “term insurance”.

These plans are nothing but savings plans mixed with insurance, complexity , high costs & commissions that are peddled through agents with aggressive (mis) selling & poor transparency. Obviously, who will buy the moment you show the product all open & make it simple to understand ?

All traditional/whole life/ Endowment plans are heady cocktails that are difficult to understand, very expensive & will give you a heavy hangover when you wake up after your “whole life” is in later phases & you need money the most.

And there is this marketing blitz. Lets us see how insurance companies market the bad & ugly with smarter words that beat logic.

The BAD & the UGLY explained:

Here are the selling propositions of whole life plans & the absurdity of logic explained from my perspective:

The Gimmick : Whole life insurance is a type of permanent life insurance, which stays in effect for as long as you pay the premiums. This means you never have to worry about un-insurability or losing your safety net as you get older.

The absurdity: You are collecting my money. Of course it is permanent as long as I pay. Why would you stop me? My money is income for you. Plus the “risk cover” in case of eventuality is very low, approx. 5% to 10% of what you get in term plans.

The Gimmick : How exactly the cash value works depends on the type of policy. For example, in a variable life policy, the cash value acts like a mutual fund, but, with whole life, it’s more similar to a simple savings account.

The absurdity: So you won’t tell me the details of charges & high expenses. “Depends” is the best I get. Mutual fund is thrown in to keep my imagination flying on returns but the “depends” eventually will kill me with the returns of a simple savings accounts with lots of costs, expenses & commissions deducted. Huh !

The Gimmick: Which plan would you pick from the table below?

Obviously the second plan is for “whole life”, has “guaranteed cash value” & earns interest. It is so obvious ! SOLD.

The absurdity: I need you to cover my risk with “high sum assured” for my family to survive on. Don’t open another savings account for me with poor risk cover. Guaranteed death benefit ? Amazing. I have deposited money all along. Of course, you will give me some part of my money back to my family. After deducting your profits & costs. Earns a predetermined interest ? I can get interest from a term deposit also at the bank. At least that will not have your expenses baked in. I need insurance to cover my life risk & provide me a peace of mind at low cost. Why the complexity ?

But why do these plans sell after all?

Because Insurance is never bought. It is always SOLD.

Never underestimate the selling authority of a person who is “known” to you, sitting face to face , motivated by high commission trails 7 is talking to people with limited financial literacy(that covers all of those who buy such plans).