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Term Vs. Whole Life Insurance (Life Insurance Explained)

welcome back to whiteboard finance my

name is Marco and I'm here to help you

master your money and build your wealth

in this video we're gonna talk about the

differences between term life insurance

and whole life insurance so insurance is

one of those things in life that's

pretty much necessary because well life

happens I could finish recording this

video right now go for a bike ride and

get hit by a car and that's that

whiteboard finance is over even though

I'd like to think that my audience would

create a you know Facebook memorial page

and you know share my videos into

eternity but we all know that probably

wouldn't happen so the fact is is that

we're all eventually gonna need life

insurance at one point or another all

throughout our lives so in this video

I'm gonna go over the differences

between term and whole life insurance

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okay so what is term life insurance okay

term life insurance provides coverage

typically for a set period of time and

most people go with 20 to 30 years on

this okay you can go less you can go

more it all depends on what you want and

what suits your needs so if you or your

spouse passes away during this time here

you are then paid the benefit of

whatever the policy is so if the policy

is worth let's call it $500,000 you

croak within these twenty to thirty

years of whatever the policy is your

beneficiaries it's usually your spouse

or your children or whoever you sign as

the beneficiaries will get this payout

period so the nice thing about term life

insurance is that it's very affordable

okay it's actually much more affordable

than whole life so typically this works

out to be for every seven dollars in

term life insurance for let's call it a

20-year coverage period you're probably

going to be paying closer to a hundred

dollars in whole

life insurance for a 20-year period okay

that's just how the premiums shake out

and I'll get into that more in depth

later

so term life insurance has no cash value

okay so you're not paying into any

premiums you're not investing any money

so as mentioned before let's use that

$500,000 as an example you pay a set

amount per month let's just call it I

don't know 20 bucks for that it's

probably a little bit more but you pay

20 30 bucks per month you get this

amount of coverage whatever that

coverage is and that's it you're not

building anything you're not investing

that money you're not making any

interest on that money think of it like

car insurance you're just paying a set

amount per month so you get a certain

amount of coverage okay so this is

actually not worth anything until you

actually need it okay

but that's actually the whole point of

insurance so that's not necessarily a

bad thing so the pros that come with

term life insurance is that it's a great

choice for people that are looking to

how do I say this replace their income

so let's say income replacement okay so

if you're someone who has a family of

four and you're making fifty grand a

year

you should typically and have something

that covers about 10 to 12 times your

annual salary so in the event of your

death your spouse or whoever your

beneficiary is can take that lump sum

invest it in the market and hopefully

live off the interest that would have

been paid to you as your salary okay so

this is also good for debt payoff and

what I mean by that is that the premiums

are much lower than whole life insurance

so you can actually use this to put down

towards debt and pay off your debts and

get out of debt okay and then finally

this doesn't apply to most people

watching this video but business

policies term life insurance is great so

if you have like a key person that's

within an organization they passed away

the organization or whoever the

beneficiary is will realize that

insurance policy so let's talk about the

cons of term life insurance so this is

one of the biggest ones it's costly to

renew the reason for that is if you use

the example of the 30 year old that gets

a 30 year policy

he still needs it say like he's still in

bet or whatever his finances are in an

order and he still needs to work if he

goes to renew this policy at sixty years

old it's obviously gonna be a lot more

expensive than when he was 30 when

you're 30 you have a lot more life to

live you're generally healthier there's

less health risks when you get older

obviously you have less time to live

meaning the policy has a higher chance

of being paid out which means that the

numbers have to work for the insurance

company so that was the cons of term

life insurance let's get into whole life

insurance so what is whole life

insurance so whole life has three

components that we need to talk about

and this is what differentiates it from

term the first one are the premiums that

you pay so there's both premiums

obviously in the term that was the $7

versus the 100 so there has to be a

reason why the hole is so much more why

is it a hundred

so the premiums are the first component

the second is the death benefit okay

this is just what it sounds like this is

the amount that you're paid upon your

death so let's just call it 500 grand

for easy numbers and then finally this

is the kicker this is what

differentiates hole versus term and

that's the cash value of and I'll put a

dollar sign here so the cash value is

pretty much what gets accumulated and

what these salespeople the sales agents

or the insurance agents try and sell you

on it's kind of like the savings

component or the investment component of

a whole life cash value policy okay so

when you pay your premium the money that

you pay remember this seven and hundred

bucks a month obviously a big part of

that is going towards actually funding

the death benefit for like the first

five to ten years okay also where these

premiums are going in the beginning

they're not going towards your cash

value which you're led to believe a very

small amount is going towards the cash

value the majority of these premiums are

going towards the commissions of the

salesperson so that's why they always

try and push whole versus term they're

also going to the administrative fees of

actually running the policy and they're

also going like I said to actually fuel

or fund the death benefit

okay so you're led to believe that oh if

you have a cash value whole life

insurance policy you're gonna make ten

eleven percent in the market it's gonna

grow and it's gonna be tech Stafford and

that's gonna be your money right well

actually that's incorrect

after all the fees and all that stuff is

said and done you're typically averaging

one point five percent on a whole life

policy okay let me repeat that one point

five percent to two point two percent

after you've paid into this death

benefit for like five to ten years that

cash value starts to build more and more

based off the premiums that you're

funding it with okay so beneficiaries

here's the big kicker beneficiaries are

only entitled to the death benefit when

you pass away okay when you pass away

the cash value that you've built up this

whole time that's the whole thing that

you've been being sold on this whole

time goes away okay this gets absorbed

by the life insurance company believe it

or not this does not go to your

beneficiaries okay so if you have a

$500,000 policy that goes to your

beneficiaries okay the cash value does

not that goes back to the insurance

company so all this money that you saved

there's a ninety three dollar difference

between the seven and the hundred that

ninety three dollar difference that

you've been saving month after month

after month after month it does not go

to your beneficiaries it goes back to

whoever your provider is okay the other

thing is with whole life insurance you

have no choice in how the life insurance

company applies the premium okay so when

we talked about the premium for the

first five ten years going towards a

majority of the death benefit the

Commission's and the fees you can't

choose what percentage that goes to the

cash value it's basically whatever their

policy says and whatever those

underwriters and analysts have decided

so the thing is you can actually the

only way to get this money right here

the cash value is to cancel the policy

and surrender your policy so you lose

the death benefit and then they'll cut

you a check for whatever that cash value

was so you're losing your insurance

that's the whole point of getting

insurance just to get your money back

that grew at a very poor rate that one

point five to two point two percent so

it sounds like I've been talking

smack about the whole life policy there

are a couple different benefits here

that cash value portion is non-taxable

as long as it doesn't exceed the total

premiums that you paid okay so if you

paid let's just call it hundred grand in

premiums as long as this cash value

isn't above 100 grand it's not taxable

anything above that hundred grand is

taxable okay

so very quickly let's just go over a

quick recap of the pros of the whole

life insurance and then we'll do a quick

recap of the cons and then I'll get into

a dollar comparison if you will so the

pros of the whole life insurance is that

you have coverage for life it's not set

to that twenty thirty years like we

talked about in the term policy okay

this is covered until the day you die

right they can do that because again

your family members aren't getting that

cash value when you pass away that goes

back to the insurance company so the

other thing is is that the premiums are

guaranteed and also the cash value is

non-taxable

and you can actually borrow against that

cash value if you want to so we talked

about the non taxable unless it exceeds

that amount borrowing against it so I've

actually watched Dave Ramsey talk about

this years ago it's kind of funny

borrowing against your cash value policy

is like going to a payday lender of the

middle-class so if your cash value

policy is like let's call it 50 grand

if you borrow against that to take out

money you have to pay a percentage on

the money you're basically going to a

loan shark okay you're paying a

percentage on your own money does that

make sense you've saved and saved and

saved and contributed that fat premium

every month now if you want to take out

money against this you have to pay a

percentage to borrow your own money does

that make sense

so let's get into some of the cons of

the whole life insurance some of the

cons are that it's obviously very

expensive okay so if this was a

restaurant I'd give it for dollar signs

next is that it's very inflexible again

we talked about those premiums not being

able to choose where they go again it's

covering Commission's fees all that

stuff I just typed in all right just

wrote premia s-- premiums

next is the cash value accumulation is

slow remember the first five to ten

years it's going towards the death

benefit it's not going towards the cash

value and then finally the big kicker

that I've mentioned a couple times now

is that the cash does not go to your

family so draw a little family here it

goes back it's absorbed back by the

insurance company okay so the whole

thing with life insurance is that it's

expensive and it's probably one of the

worst financial products out there in my

humble opinion okay because it's not

doing what it's supposed to do it's not

supposed to be an investment product

it's supposed to be an insurance product

you don't go to your car insurance and

say hey I'll pay you more premium if you

get me back 1.5 percent over 20 30 40 50

years that would be stupid so let's move

on to a cost comparison example here

very quickly so say we have a 31 year

old guy that has $100 a month budget to

spend on insurance okay so he can get

125 grand in term he can get 125 grand

in whole this one is gonna cost them 7

bucks a month this one's gonna cost them

$100 a month if you just did a simple

investment calculation okay let's just

say we're getting 8% in the market over

20 years because that's what this term

policy is going to be for you're gonna

end up with two completely different

numbers this 93 dollars the difference

between the hundred and the seven okay

so

93 dollars at 8% over 20 years would get

you I believe it's fifty two thousand

nine hundred and seventeen dollars in

the market over 20 years this if you

want to invest at like one and a half

percent which is what whole policies

typically return one and a half to two

point two percent after fees commissions

you know inflation all that stuff you're

gonna end up with typically twenty five

thousand nine hundred and eighty-three

dollars okay so it's a big difference

that's basically a twenty eight thousand

dollar difference so with all that being

said I hope that this was just a good

primer there's obviously different

policies different companies different

coverage amounts all that stuff that

needs to be taken as a consideration I'm

not talking about health age things like

that I just want to give you the big

open facts about the difference between

whole life insurance and term life

insurance so I hope this video was

valuable for you in the middle class I'm

definitely gonna be getting term life

insurance once I grow a family there's

really no reason for me to get it right

now at this point even though like I

said I could get hit by a bus right now

but if you got value out of this video

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have a prosperous day