Term Life Insurance vs Whole Life Insurance: Help!

Choosing the right type of life insurance is certainly not an easy task. Many people have heard of term and whole life insurance but may not know exactly what each offers. The question about whether one kind of life insurance is better than the other has been debated by financial experts for quite some time, and there has never really been a resolution to the debate. So lets take a look at term life insurance vs whole life insurance to see which one may be the better choice for you.

Term Life Insurance Explained

As the least expensive way to enter into a life insurance policy, term life insurance offers a no-frills approach to life insurance. Term basically provides death coverage that is paid to your beneficiaries when you die (heaven for bid), and it does not offer any kind of interest, investment vehicle or opportunity to borrow against the premiums you’ve paid each month.

Term offers the lowest monthly premiums amongst all life insurance coverages. Term life insurance rates typically are very affordable, and you can obtain a substantial amount of coverage – assuming that you’re healthy and under a certain age (typically 65-70). It’s not uncommon for a healthy person in their twenties or thirties to obtain a term life insurance policy with anywhere from $250,000 to $500,000 or more in coverage for as little as $10-$20 per month. Term life insurance rates are totally dependent on the company you go with, how healthy you are, your age and how much coverage you want. Most term life insurance plans offer anywhere from 10 to 30 years of coverage where the rate stays fixed, but there are also variable plans available as well.

Whole Life Insurance Explained

On the other hand, whole life insurance is much more complicated than term. Basically, whole life insurance offers the same type of death benefit as term, but it also includes an investment component as well. As you may well imagine, this means that whole life insurance costs much more than term life insurance in relation to monthly premiums for the equivalent amount of coverage. So what do you get for all this extra money you’re contributing?…

It varies greatly between different life insurance companies, but the additional money you pay each month gets invested into some sort of investment vehicle, such as mutual funds, bonds, money market funds or other types of investments. The rate of return varies company to company, but it’s usually between 5-8 percent return per year that your money earns. This money – and the money you contribute each month – sits in your account and grows year after year until you either withdraw, borrow against, or die. Often times you’ll see whole life insurance companies refer to their insurance as “retirement plans”.

There are three main types of whole life coverage: traditional, universal, and variable. Traditional coverage offers guaranteed annual premiums, cash value and death benefits. Universal life is much more flexible, and the premiums can vary from year to year. This type of policy does not pay dividends; instead, it pays out interest based on various factors and is reassessed each year. Variable life insurance coverage is the riskiest of the bunch. There are minimal guarantees with this type of coverage, although it offers the greatest potential for cash value growth and often allows the buyer to select the investment vehicle (i.e., money market funds, mutual funds, aggressive growth stocks, etc-).

Term Life Insurance vs Whole Life Insurance: Which is Better?

I’d love to have a straight answer to this question, but unfortunately there’s not one! Some financial experts feel very strongly about avoiding whole life insurance like the plague, while others say that term life is like throwing your money away. The fact is that finding the ideal life insurance policy for you should be based on your personal own situation, including your age, health and financial well-being. Let me explain…

If you are relatively young (20’s or 30’s) and healthy, looking into whole life insurance may not be that bad of an idea. That being said, it’s essential that you do your homework and compare different life insurance companies before choosing to go with one, because whole life policies typically charge a lot of fees so it’s important to choose the right company the first time. Whole life coverage should not even be considered if you plan to have it for less than 20 years. Again, this is because of the amount of fees charged and the amount of time that the policy will need in order to grow your cash value to respectable levels. In many cases, your first years premiums will only cover the initial fees of your whole life policy, so you can see how it would take quite a few years to actually start building up any significant cash value.

Some financial experts, such as Dave Ramsey, are 100% against whole life policies, and he makes a good point about them. Whole life insurance policies tend to grow their cash value about 5-8 percent per year, which may seem like a pretty good return on your investment, but take a look at the history of the stock market. The stock market has averaged about 12% growth since its inception, which is obviously much higher than 8%. So he recommends obtaining a good term life insurance policy with enough coverage to make sure your debts and beneficiaries are taken care of if you should die. Then invest in a growth stock mutual fund instead of putting all of your eggs in one basket with a whole life policy. For example, instead of contributing $100 per month to a whole life policy that will earn you 5-8 percent per year, get term coverage for about $15 per month and invest the other $85 per month into a growth stock mutual fund which has averaged 12% per year since the dawn of the stock market.

So if you’re young and maybe not very good at saving, a whole life insurance approach is one that you should at least consider. On the other hand, if you’re less than 20 years from retirement, you may want to look into term life insurance and a growth stock mutual fund as a supplemental retirement plan. These general guidelines will hopefully point you in the right direction or at least give you a little more incite into the confusing world of life insurance!

2 Responses to Term Life Insurance vs Whole Life Insurance: Help!
  1. Cale

    I bet I’m boosting your alexa ranking, haha. I like reading at your site. Thanks for the hard work!

  2. Etta Tayloe

    Not having knowing your distinct fiscal circumstances or ambitions, the general rule is term life insurance for 7-10 situations your earnings. Because you have young children you will want at least a 20 year period merchandise to be sure your household is protected till they may be adults.

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