Whole vs Term Life Insurance

Life Insurance Basics: Term vs. Whole Life


12 March,2013

Life insurance is one of those things you get for the benefit of others. Adequate life insurance can help your family provide for their needs after you are gone. If you have dependents who rely on your for their financial maintenance, it makes sense to get life insurance.

When you decide on what type of life insurance to get, you normally have two main choices:

  1. Term
  2. Whole life

While there are some other options, this is the choice that most people need to make when choosing life insurance coverage.

Term Life Insurance

This is life insurance that is bought for a specific period of time. Once the term is over, you no longer have coverage. You can usually buy term life coverage for anywhere between five years and 40 years.

One of the most common terms is 20 years. This is a term that is usually sufficient for the insured’s children to grow to adulthood. I have a 30-year term life policy, designed to get me to retirement, and provide enough coverage to pay off our debts so that my husband and son don’t have to worry about the mortgage and car payments.

As we get closer to paying these obligations down, the life insurance pay out can be used for other items, such as helping pay for my son to attend college.

Term life insurance is generally fairly cheap. It’s possible to get a large amount of life insurance at a relatively low price when you choose term insurance. However, once the term is over, all of the money you paid in premiums is gone (unless you have a policy that promises a partial return of premium if you outlive the policy).

In some cases, you are offered the option of a hassle-free renewal of your policy for another term. You might see a premium increase, but it is normally not as high a price as you would pay if you were getting insurance new at your age.

Whole Life Insurance

Rather than expiring at the end of a specific period of time, whole life is designed to provide a benefit to your heirs no matter when you die. Whole life insurance (and it’s cousin, universal life insurance) remains in effect as long as you pay the premiums on time.

In many cases, it’s possible to find a whole life insurance policy that builds cash value. So, as you continue to pay premiums, a portion of what you pay benefits you. Insurance companies invest the money, and you benefit from some of it.

The cash value usually builds at a very slow rate, though. However, over time, it can add up to a somewhat decent amount — although it is unlikely to fund your retirement. You can also borrow against your cash value, providing you with emergency assets.

Whole life insurance is usually more expensive than term life. Because it is meant to cover your entire life, there is a greater chance that the life insurance company really will have to pay benefits to your survivors.

Consider your needs, and evaluate how much life insurance you need, and then decide whether term or whole life is most likely to fit your situation.