Term Versus Whole Life

Buying life insurance can be an overwhelming task if you are not familiar with insurance. There is such a wide range of premium pricing and face values of the policy. For there to be such a wide range of products it is clear that it is not a black and white choice. Different objectives and thinking demand choices.

Let's start with a quick definition of what the difference between these 2 products are.

Term insurance is "pure" insurance. You pay a premium and if you die the company pays, if you don't they keep the money. Most term policy's are for a defined duration. The typical policy's are 10 year, 20 year, or 30 year policies. You pay the same premium based on you current age for 10, 20, or 30 years. After the time lapses your agreement is over. This is the one product that you purchase that you really don't want to use! These policies are usually very affordable if you insure at a relatively young age. At the time the policy lapses if you have a continued need for insurance it can be rather expensive to replace because you will be older. If you have certain medical issues develop you may not be able to obtain insurance, or have to pay extra to be covered. Those 2 issues are the main risk with term insurance, expensive premiums later, and risk of not being able to obtain any insurance at all. The 2 benefits are being able to buy a much larger policy and paying a much smaller premium.

Whole life on the other hand is a permanent insurance. The price is much higher initially. For example if a term policy would be $50 a month for, the same face value might be $150 for whole life. And the face of the policy is likely less too. Whole life build a cash value. There are people who say that this is a waste and that the money doesn't appreciate as well invested in life insurance. Each company has their policy of where the excess cash is invested so I can't comment. What I can say is most guarantee a small % gain which is more than a stock or mutual fund will do if you invest directly with them. The other issue is tax treatment. Most of these policies also have a loan feature where you can after a few years of accumulation borrow the excess money. This can be a nice feature if you have trouble saving cash.

Self insuring is obviously the cheapest choice, but most of us have families and obligations that we need to ensure are properly cared for. If we don't have a lot of excess cash life insurance is a necessity. Which kind is best? Well that depends. If you have the absolute minimum cash or a lot of excess cash term is probably right for you. If you are somewhere in the middle whole life may be a better option. Personally I have a blend of both. I carry a 30 year term policy for $100,000 and a whole life policy for $50,000. By the time my term expires I will not replace it. My children will be old enough to maintain on their own and hopefully my expenses will be low.

For the first 2 years in some states some things are excluded and your policy may not pay out. It is best to discuss these exclusions with your insurance agent. There is also a large difference in premium for smokers.

This post is for information only. This is not intended to be insurance advice. Each person is different and consulting your insurance agent is the best way to determine your needs.