Should I Buy Term Life or Whole Life Insurance?

When it comes to life insurance, this is the probably one of the most frequently asked questions. Neither is really ‘better’, but each type of policy serves its own purpose and has its own advantages and disadvantages.

Let’s start with term life. Term life (sometimes referred to as temporary life insurance) is probably the most commonly purchased type of life insurance, mostly because it is also the least expensive. A term life insurance policy is only meant to cover a person for a specific period of time (the term). Term policies are typically issued in 10-, 20- and 30- year increments, with the shorter term policies being less expensive than the longer. On most policies, the premium is locked in for the length of the term.

A 10- year term policy, for example, will have a fixed premium, and pay a fixed death benefit to your beneficiary if you pass away within 10 years after purchasing the policy. If you are still alive after 10 years, then the policy lapses, you are no longer insured, and you get nothing back (term policies typically do not have cash value accumulation). If you still need life insurance, you start from scratch. Considering will be 10 years older, the premiums on your new policy will likely be much higher. You also face the risk that your health could change, and you may no longer be insurable in 10 years.

Most companies will give you the opportunity to keep the policy after the term ends; however, the premium is no longer fixed, and will increase dramatically each year that you keep the policy in force. Most insurance companies will also give the policy owner the opportunity to convert all or a portion of their term life policy to whole life (or another form of permanent life insurance) at a higher premium. There is often an age restriction on converting.

Term life policies are often purchased with a specific purpose in mind. People often purchase term life when they buy a home, so that their spouse can pay off the mortgage in the event of their death. Once the mortgage is paid off, there is no longer a need for the insurance, so therefore the temporary nature of this type of policy is practical. This is often referred to as ‘mortgage protection’ insurance.

People also tend to purchase term life when they have children, since their children will usually be financially dependent on them for the first 20 years or so of their lives. A 20-year term policy may be ideal for a new parent without a great deal of expendable income (to purchase whole life) but who would like a policy in place to make sure their kids are taken care of monetarily should a parent pass away before the child is an adult. Again, this is a temporary need, since once the child or children are grown, they are no longer financially dependent, and the insurance need is no longer there.

Whole life insurance, on the other hand, is a permanent form of life insurance. There is no term length, and it is designed to insure a person for their entire life. While this does sound ideal compared to the temporary nature of term life, the biggest disadvantage is cost. Whole life is considerably more expensive than term life.

Most companies will offer multiple payment options on whole life insurance. For example, they may offer a 10-pay or a 20-pay whole life policy. That means that you only pay premiums for 10 or 20 years. After the pay period, no more premiums are due on the policy, and the policy stays in force until your death, no matter when that might be. If you pass away before the pay period ends, the full death benefit is still paid, and no more payments are due.

Some carriers also offer single premium whole life insurance, where you pay a single lump sum upon purchasing the policy, and you have a policy in force for your entire life with no further premiums due.

Another advantage of whole life is cash value, which accumulates within the policy over time, and can be borrowed against by the policy owner as a source of funds. Within the policy these cash values grow tax-deferred. Policy loans will decrease the cash value and death benefit of the policy. Whole life cash value tends to accumulate slowly within the first few policy years, and then start to accelerate as time goes by. Upon purchasing whole life insurance, your agent is required to provide you with an illustration which shows how the cash value and death benefit of a policy will change over time.

As you can see, both term and whole life have their advantages. Which one is better depends on the situation of the individual purchasing it. Term life is by far the less expensive option, but is not permanent, and does not have as many benefits. While whole life will cost you more, the permanent death benefit and cash value accumulation might be worth the extra premium for some people. In any case, it is a good idea to talk to a professional and weigh the differences before making your decision.

Term Life
-inexpensive compared to whole life
-premiums are fixed for a period of time
-ideal for someone with a temporary life insurance need (such as dependent children, mortgage)

Whole Life
-you cannot outlive the death benefit
-accumulates cash value, which can be used by the policy owner
-much more expensive compared to term insurance
-premiums will never increase

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