I have a few insurance agents in my family who tell me that quite a good number of customers aren’t familiar with the differences between whole life insurance and term life insurance. In fact, a lot of folks tend to think that life insurance comes in one flavor. Of course, that’s not the case.
What Is Whole Life Insurance?
Whole life insurance serves a dual purpose. First, it acts as a life insurance policy in case something happens to you, and ensures that your family is cared for financially in the case of your death. In addition, this type of policy acts as a type of savings or investment account. The policy is typically for life (unless you cash it in), and usually carries much higher premiums. As you pay your premiums every month, you build what is called a “cash value” in the life insurance. This means that if some unforeseen event occurs, you do have the option of borrowing from this cash value to pay for that emergency. This type of insurance can be included in your net worth because it acts as a savings account. Therefore, it is considered an asset.
What Is Term Life Insurance?
On the other hand, there’s term life insurance, which is insurance that is in effect for a specific amount of time, typically for twenty- to thirty-year terms. This type of insurance carries no savings, and the premiums are much cheaper than a whole life insurance policy. And that is what’s so attractive about it. It’s a lot cheaper. This is because you pay premiums on this insurance for the term of the policy, and then when that term is over (if you are still alive), there is no savings. And here’s where most people take a misstep or two: they write off term life because they aren’t getting anything back at the end of the term. But the point here is whether you really want to use your life insurance policy as a way to save. I personally don’t feel that you should. You should ask yourself whether you would prefer using your insurance payments as a savings vehicle or whether you should keep insurance and savings separate. Term life costs much less because you are only using it for insurance purposes and it acts just as it should: as a life insurance policy that takes care of your family should something happen to you.
Comparing Whole Life Insurance vs Term Life Insurance
So, which policy is better? Well, that depends on how much money you have to spend and your expectations for the future. If you need a policy to assist your spouse and children over the next twenty years should something happen to you, and you expect to have a substantial amount of money saved in other investments by the end of that twenty years (typically ten times your income), then term life insurance may be the way to go. In addition, keep in mind that if you have a whole life insurance policy and you die, the insurance company usually keeps the “cash value” on that insurance. They still pay out the policy’s death benefit amount to your family, but your family won’t get the “savings” that you paid such high premiums for when purchasing this type of insurance.
Another helpful tip is to make sure you are comfortable with your insurance agent; as with anything else, shop around. It is important to know that a good insurance agent will save you money on your life insurance policy — whether you choose whole or term life insurance.
Ultimately, the type of insurance you choose is up to you. In my own personal situation, I have opted for a term policy because I choose to save or invest my money in other investments that are going to yield far more than a whole life insurance policy would yield. In addition, many folks have employers who already offer term life insurance as well as disability insurance, free of charge. If you’re in this boat, then it makes sense to go with this type of life insurance policy for now.
If you are seriously thinking about getting life insurance (you should, if you have children and are married), then you may want to do some price comparisons. You can check out our article on how life insurance policies are priced to get a better idea on how fees are set. You may also want to become more educated on the language of insurance policies before investing in one. A great book for this is called Winning the Insurance Game, by Ralph Nader. You can also contact a company called Insurance Information, Inc. at 1-800-472-5800 for price comparisons on different insurance policies. This company offers great pricing information, and it works independently from the insurance companies. They can send you a free packet regarding their services to get you started.
Whatever life insurance you decide to go with, make sure you understand what you are getting. Never pay for something you do not understand.
Created Nov 11, 2010. Updated July 1, 2012. Copyright © 2012 The Digerati Life. All Rights Reserved.
{ 13 comments… read them below or add one }
I chose to get whole life insurance because there are health problems in my family that mean I’d expect to be uninsurable after 1 term and I also expect that I will have considerable medical expenses before I die that I don’t want my partner to be responsible for paying.
Nice article. I agree with you. My wife and I have term life insurance instead of whole life. We are able to afford much more in life insurance this way and we invest the difference.
Dear Friends,
@ Honey, It will be good for you if you purchase a Health plan from any Life Insurer. A life insurance company provides floating insurance cover for 10-15 years. Considering your family history it will be a good decision.
Several aspects of insurance that may be helpful:
First, buying whole life instead of term because one is worried about becoming uninsurable is not necessary. A guaranteed renewal rider is a common enough feature of many term policies.
Second, the maximum insurance amount is generally needed early in life, while children are small and the cost of raising them for longer periods would be highest.
Third, often major medical coverage is more significant than life insurance. Catastrophic illness or major accidents can be far more financially devastating than a death to the surviving family.
Fourth, don’t let anyone sell you “mortgage cancellation” insurance–it is usually the very worst value going. Besides, a low-interest mortgage may be far less of a problem than the simple lack of cash for other needs. So if you want insurance that would cover the amount of a mortgage, get a separate policy which a survivor may use to pay off the mortgage, but is not forced to.
Readers of financial advice blogs are generally able to do their own investing–and whole life insurance is often a very bad “investment.” Besides, should you die you receive only the face value of the policy in a traditional whole life plan–any “cash value” is at that point illusory. By contrast, if you have term insurance plus investments, upon death the survivors get both the insurance proceeds and the investment.
Term insurance in recent years has become far more affordable than it used to be. Still, at some point later in life when any children are on their own and you have reasonable savings, you might find that life insurance no longer makes much sense. It all depends upon individual circumstances.
Finally, don’t overlook insurance plans from employers or membership organizations. Sometimes, these can be extremely affordable.
Good overview, thanks. I agree that it can be extremely difficult to determine what’s right for you, depending on your circumstances. I have two young daughters and a complicated family life due to a soon-to-be ex-spouse. I found your tips useful: they are helping me figure out what life insurance to buy.
I’m not sure about all those people who are championing whole life. I believe that in most situations, a term life insurance policy is the best choice. I’m by no means rich, but I do understand the importance of being insured, and I thing that getting a term life policy is the right move.
Whole life is best — but few can afford significant coverage with whole. Term is the way to go if you just need simple coverage!
Another way to look at term life is that it should only be used to provide enough death benefit to cover your existing expenses such as a home loan and expected income over a set period of years. Great suggestion on Mr. Nader’s book on how to win the insurance game. Don’t overpay on insurance if you don’t have to.
Most people don’t have enough life insurance in the first place. Whether buying term, permanent, or a combination of both, you should evaluate the need first, then figure out how long to guarantee the benefits and how much you can pay.
This is the kind of stuff I believe kids should be taught in high school, right along with how to manage money properly. There are many good agents out there, but unless you give a few a try and do some solid research yourself, it’s a bit like insurance roulette. Glad to see this article and hope to see more from you!
Term life insurance tends to be the more financially sound option for most people and their families. During tough times, Term Life can really make a world of difference in terms of allowing a family to maintain their lifestyle.
I would suggest to anyone that i know to get the whole life insurance rather than term insurance because I’ve heard that whole life insurance can be passed on to your child if you believe that your savings are enough to cover their expenses without using the benefits of your insurance. But both insurance policies can be useful for different people with different concerns.
If I were to buy my insurance policy now, i would decide to buy whole life insurance. No doubt about it.
Great info. I have been looking for the best policy for me. This helps a lot.