Should I Choose Term Insurance or Whole Life Insurance?

With the rates for Term Life insurance being at all time lows; many financial and insurance experts agree that Term Life Insurance is a good choice for most individuals. Before we discuss why that may be the case, let’s take a moment to review the differences between Term Insurance, and the most popular form of Permanent Life insurance, Whole Life.

Term Life insurance is a death benefit only life insurance policy that you purchase for a set length of time, usually either 10, 20 or 30 years. If you die anytime during the term, your chosen beneficiary receives the full amount of the death benefit. However if you die even one day after the term, your family doesn’t receive a dime. So when purchasing a Term Life insurance policy, it is important that you not only determine the appropriate benefit amount, you must carefully figure out the length of the term.

Whole Life insurance on the other hand is what is referred to as Permanent Life insurance. There is no term limit and it remains in effect until the day you die, so long as your premiums and other policy obligations continue to be met. In addition such permanent life insurance policies have a “cash value”. There are other forms of Permanent Life insurance such as Universal Life, and Variable life – but for the sake of this comparison we will restrict our discussion to Whole Life, as the differences between Whole Life and the others are subtle.

Whole Life insurance policies are much more expensive than Term Life insurance polices. This is mainly because with a Whole Life policy, a portion of your monthly premium is invested in a tax-deferred account or savings plan. Thus, the policies build equity and funds for retirement. However, many financial analysts say that Life Insurance may not be the best investment for retirement savings. They suggest that people purchase a Term Life policy, and invest the difference in monthly premiums in some other Tax deferred savings plan, which often have greater yields.

There are those who feel that at least with Whole Life, you are “getting something” besides the insurance. In other words, with a term policy, suppose you “outlive” the term? You just paid tens of thousands of dollars for “nothing”. To try to make up for this disparity between Term and Whole life, many insurance companies have recently introduced a product called Return of Premium insurance.

Return of premium life insurance is exactly like Term Life insurance with an added bonus. At the end of the term, you receive the entire amount of premiums paid over the life of the term. So if you buy a 30-year Return of Premium life insurance policy and you a have been paying annual premiums of $1,000, if you're still alive after the thirty years you'd receive $30,000 back from the insurance company.  Such Return of Premium life insurance policies cost more than standard term policies, but many people find them attractive for their “nothing to lose” scenario. But again, savvy financial advisors point out that one could conceivably invest the difference between the cost of standard Term Life and premium return, and see a return of more then the “give back” over the length of the term.

In summary, for most people a Term Policy is a good idea, but that is not to say that there aren’t some people for whom a Whole Life policy would make more sense. It’s best to discuss your needs and life circumstances with an insurance professional, who can help design the Life Insurance product that is best for you.