How To Save Money On Whole Life Insurance Using Term Blending

whole life term insurance

Whole life insurance is often thought of as the “Cadillac” of life insurance. It’s expensive, it provides a lot of benefits, but it’s only for rich people or businesses. It’s earned its immortality in the life insurance industry because of its stability and reliability. However, it’s not necessarily an expensive insurance option. Whole life can be blended with other forms of insurance thus reducing the overall premium.

What Is Term Blending?

Term blending is what happens when whole life insurance is mixed with term life. A whole life insurance policy is structured so that most of the premium is set aside to pay for the future death claim. This cash reserve is called the cash value and is synonymous with all whole life policies sold in the U.S.

While a large portion of the premium is used to pay for the agent’s commission in the early years of the policy, the actual insurance costs associated with the death benefit decrease each year the policy remains in force. This is because the cash value offsets the cost of insurance. The difference between the cash value inside the policy and the total death benefit is called the “net amount at risk.” This “net amount at risk” is guaranteed to decrease – thus decreasing the net costs for the policy.

This is often obscured by the fact that premiums must be sufficiently high to make all of this happen. An easier way to buy whole life insurance, and get the benefits of a permanent life insurance policy, may be to blend term with whole life.

Term life’s advantage is its low premium commitment. Since there is no cash value, the premium can be lower than whole life. Term policies aren’t designed to be carried into extreme old age. Even when term policies are purchased at the upper limits of insurability (i.e. over age 60 to 65), premiums can be prohibitively expensive.

By blending term with whole life, you lower premiums by virtue of the fact that a substantial portion of the policy is term life insurance. The base policy is whole life, so you get the permanence of whole life.

The result is a whole life policy that’s priced lower than a traditional whole life contract.

Using Dividends To Pay Term Premiums

If your policy pays dividends, you may be able to significantly reduce the cost of the policy further by allocating some or all of the dividend to the premium payment.

With participating policies, a life insurance company often pays dividends when it has excess funds generated by its investments or a favorable mortality experience (i.e. few people died the previous year). While dividends are routinely paid out by many mutual life insurers (and by some public companies), they are never guaranteed. Even when premiums are paid consistently for many years, the actual dividend amount may fluctuate in any given year.

If you’ve been relying on dividends to lower your monthly premium, you may end up paying higher out-of-pocket premiums if dividends are cut. Because of this, you should never rely on dividends to pay for any of the policy premiums.

Periodic Conversion

To get the benefit of a whole life policy over time, periodic conversions are often necessary. As enough money becomes available through dividend payments or cash value in the policy, some of the term insurance may be converted to whole life. There is no increase in premium, which makes the conversion seamless and painless.