Whole versus Term Life Insurance: A Comparison

Whether or not they own it, most people agree that you should have life insurance. However, it isn't always easy to know what company to buy from or what type of insurance to buy. Companies that only sell term life tend to imply that purchasing whole life is at best unnecessary and at worst a scam. Companies that prefer to sell whole life are more likely to caution you about having insurance that can expire and be too expensive in later years to replace. The truth is, while life insurance should be regarded as a necessity, it is true that purchasing a policy that does not meet your expectations can ultimately seem like a major mistake. Hopefully this comparison of Term vs Whole life will help you determine what you need in a life insurance policy.

Defining

Term life insurance is a policy that will provide a benefit if you should die in the period of time provided by the "term." At the end of the period, the premium–should you decide to renew, goes up sharply and increases annually for another 10 or 15 years after which it expires.

Whole life, as it sounds, is for your entire life. Variations abound, which may have increasing premiums or waiting periods, but the standard "guaranteed whole life" will have level premiums, a level death benefit, and will build cash value. Premiums are reasonable if purchased while you are young.

Advantages

Term life is cheap even in high face values. If you are young it is possible to get a policy that will last 30 years. Riders such as spouse riders and disability riders are available. While the policy itself is not really designed to be renewed—the renewal premiums are very high—it can be converted to any other policy offered by that company without medical underwriting. Thus, if you decide in later life that you don't need the large term policy, you can simply convert it to a much smaller whole life without worrying about answering a lot of health questions.

Whole Life will never need replacing.  High cash values are available if you meet the underwriting requirements.  You can purchase additional riders, and because it builds cash value, you can borrow against it. You can also cash surrender it if you decide later in life that you don't need it. The benefit can be turned into a cash stream by your beneficiary rather than being paid in a lump sum. Also, the policy, if you live long enough, will eventually endow— meaning the face value and cash value will be equal, at which point the company will give you a check upon request.

Disadvantages

• While the initial cost is low, the rates for a whole life in your later years will be much higher. Thus, it is important to know what type you need.
• A term life has no cash value, thus no loan option. An unrecognized consequence is that, since there is no cash to keep the policy going, it will lapse within 30 days if you miss a payment. A whole life, in contrast, can be set up for an "automatic premium loan" if you should miss your payment.
• The primary disadvantage of a whole life is the cost. Premiums are very reasonable for younger buyers but are much higher than Term Life.  Due to the higher cost, people often make the mistake of only purchasing enough for burial.
• Loans are available, but the interest must be paid yearly. If you borrow against a whole life and do not pay the interest, the policy will eventually lapse for loan insufficiency. You should not purchase the policy solely for a source of loans.

Circumstances to Consider

Purchase Term Life if:

• You need a large amount of coverage for a limited time period;
• Your assets will provide for a spouse in later life, making a large life insurance unnecessary;
• You want the protection for a family or business interest and are not concerned about building cash value.

A whole life is best if:

• You want to leave a legacy or inheritance;
• You want cash value that you might access later in life;
• You want coverage that will last your whole life and be the least expensive in the long run;
• You want the option of converting your policy to an annuity for retirement funds.

Variations to Watch for

Term Life

• Annual renewing Term
• Decreasing Term
• Graded benefit Term
• Modified premium Term

Whole Life

• Graded benefit whole life
• Modified premium whole life
• Variable whole life
• Universal life