Term vs. Whole Life Insurance: How Market Trends Impact Both

Remember when your parents could buy a house for the cost of a vacation? It's remarkable how dramatically the cost of living has changed throughout the decades. In the last five years alone, the cost of housing, food and beverages has gone up over 29.3%, while fuel and utilities are up 28.5%, according to the Consumer Price Index.¹

Inflation affects life insurance, too. A $500,000 life insurance policy from the late 1990s, which used to be enough to support a family, isn't as valuable today. In the past, it could have paid off a house, sent kids to college, and covered living costs for years.

How inflation affects insurance policies

When looking at life insurance, knowing how inflation and market shifts can affect different policies is crucial. This ensures that your coverage will remain useful down the road. For instance, term life insurance is less expensive now, but inflation can reduce its value over time. Whole life insurance, on the other hand, is more expensive initially, but it builds value that can keep up with rising costs.

Whole life insurance responds to inflation in the following ways:

• Premiums are guaranteed not to increase.
• If premiums are paid, the cash value component, or savings portion, builds over time.
• The potential cash value grows on a tax-deferred basis, regardless of inflation.

Inflation also affects term life insurance policies, but in different ways:

• When a term policy ends, getting a new one can cost much more and might be harder because of age and health changes.
• You could end up paying much more for the same coverage or even find that you can't get new insurance at all, especially when inflation has already decreased the value of your coverage.

How the interest rate impacts your policy

Interest rates have been very low for the last 20 years. This affects how life insurance companies invest their money from customers to pay future benefits.

When the Federal Reserve announces an interest rate change, it sets off a chain reaction.² Here’s how it affects your life insurance:

• For term life insurance, the policies don't gather cash over time, so changes in interest rates mainly affect new policies. If you're looking for term life insurance when interest rates are rising, you might notice that premiums are a bit higher because companies adjust their prices.
• With whole life insurance, when you pay your premium, the insurance company invests that money, usually in bonds and similar things. When interest rates increase, the investments make more money, which can lead to higher dividend payments on whole life policies that share profits.

Unlike your savings account, which might adjust rates within weeks of a Fed announcement, insurance companies typically adjust more slowly. Don't expect immediate dramatic increases in your policy's performance.

If you have a cash value policy for a long time, like 20 or 30 years, the ups and downs of interest rates will even out. It's important to know that your policy's value changes with the overall economy, but not as quickly as the stock market does. So, letting your policy end just to save some money is not a good idea

The role of insurance premiums in financial strategies

Life insurance premiums can impact your financial goals, so allocate them wisely. Term insurance offers significantly lower premiums, often five to 10 times less than whole life coverage, freeing up funds for other financial priorities. This is especially beneficial during economic downturns or inflation spikes when budgets are tight.

For example, a family paying $600 annually for term insurance instead of $6,000 for whole life saves $5,400, which can be used for emergency savings, retirement, or paying down debt. On the other hand, whole life insurance offers consistent, higher premiums, providing predictability in uncertain times.

For those planning retirement, it's important to consider not only the cost of life insurance today but also future insurance costs so you can plan for changes in market conditions. Many policyholders find this stability worth the higher upfront cost, especially as inflation affects other budget areas.

How to consider the cash accumulation component of a life insurance policy

Whole life insurance is primarily about providing insurance, not just making money. Its savings component works differently from other investments. Unlike stocks, which can go up and down, whole life insurance grows steadily and with less risk.

During high-inflationary periods, policies that pay dividends may increase in value, but it can take a few years. If interest rates increase, new savings from your premiums might earn more. In good economic times, sticking with whole life insurance might not seem as profitable as investing in stocks.

The best approach combines investment accounts for growth with carefully chosen insurance for safety and diversification. This balanced approach helps keep your finances stable and prepared for economic storms.

Choosing between term and whole life insurance

Money earned today will not last as long in the future, an unfortunate reality of inflation and longer lifespans. Choosing between term and whole life insurance isn't just about coverage but also about how it will stand up to economic factors and your own financial situation.

Here's a summary of how they measure up:

How to talk to loved ones about LTC insurance

Once you start thinking about how you want to live as you get older, it’s time to loop in your loved ones. After all, you won’t navigate long-term care alone. They’ll help with decisions, provide hands-on care, or coordinate professional help. Talking things through now ensures your plan works for everyone.

Here’s how to approach the conversation:

Term life insurance

Whole life insurance

Now that you know the difference between whole and term life insurance, how do you decide which is best for you? Understanding how these policies react to inflation and market shifts is key, but your personal risk tolerance is equally crucial when deciding what's best for you and your family. At Mutual of Omaha, a financial professional can help you assess your unique situation and decide which policy is more suitable. Fill out the form, and a financial professional will contact you to help you understand your options.