Which Is Better For You: Term or Whole Life Insurance?

by Hank Coleman

insuranceTerm and whole life insurance policies are amongst the most popular policies issued to people today. Term policies basically cover a fixed span of time such as twenty or thirty years.  Whereas whole life policy covers not only the term of the policy which is your entire life but also any interest that has accumulated on top of it.

Term & Whole Life.  In term life policies, there are two types of premiums: level term and annual renewable. The level term remains constant for the whole term of the policy and can be bought in increments up to thirty years while the latter increase its level of coverage as you age.  On the other hand, the whole life policy has two elements: the mortality charge and the reserve. The mortality charge is the amount paid for insurance and the reserve denotes the investment component that earns interest.

But, Which One Is Best?  While everyone’s situation is different, the best type of insurance policy for most people is definitely term policy for a host of reasons. The term policy is life coverage only and upon death the beneficiary receives a face value of the policy.  The whole life policy on the other hand provides you with cash value that you can borrow against that accrues the longer you own the policy.  

Costs.  Overall whole life policies are a much more expensive route than term policies.  I can remember that my wife and I were quoted something like $100,000 whole life policy with an investment portion that was going to cost over $100 a month.  But, we ended up buying a level 30 year term $500,000 policy which only costs us somewhere in the neighborhood of $70 a month!  Crazy, right?

Good Investment? No!  Where it seems that saving more money in its investment portion is good for the long term, it really isn’t.  The rate of return for most policies is small, in the range of 2% to 3% which will barely keep up with inflation.  There are better investment opportunities than these available, and thus they can be qualified as forced savings.

High Commissions.  These policies also come with high fees and commissions, with their typical commissions which can be as high as 100% of the first year’s premium.  This is one of the biggest reasons that commission based financial planners push these insurance policies.  They make them the most amount of money and cost you the most which is never a winning combination for the consumer.  These hidden costs and expenses are what make the term policy look better in front of the whole life policy.

Your Need.  With whole life insurance policies, you own the insurance for your entire life until you die.  But, you may not need insurance later in your life.  What income are you protecting for your family to live on if you are 70 years old and retired?  A twenty year old who buys a thirty year level term policy will see his insurance coverage ending right after his kids may theoretically be grown and gone off on their own.  That’s the perfect time that you do not need coverage.

Whole life policies are not always bad. If you’re wealthy and want to employ whole life in your estate planning, the policy can actually prove to be beneficial. Also if you’re prepared to wait for the long haul to your premiums returned to you, whole life policy may be a good option. But, for the purest form of coverage, term policies are almost always a better option for most people.  They cover death benefits and can usually be renewed depending on your health.  Where the time limit is a lot shorter or where there are young families with large financial obligations, time policies should be invested in. They’re substantially low premiums allow them to purchase enough coverage to protect against the loss of income.

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Evolution Of Wealth October 27, 2009 at 10:55 pm

I guess I hate reading these articles because they never really tell the whole story. Truth is from a cost standpoint term is almost always more expensive than whole life. With term the money is gone and then you have opportunity costs. With whole life you are guaranteed to get some of your money back. Some return is less costly than none.
From a commissions standpoint, term pay higher commission rates. More often closer to and exceeding 100% of first year premium.
Then from a returns standpoint a well structure whole life policy will easily return more than 2 or 3%. I wrote a post on it called Life Insurance Secrets http://evolutionofwealth.com/2009/08/24/life-insurance-secrets/
Maybe I’m just trying to create controversy. It’s like saying no mutual funds beat the market. At any given time some do and some don’t.

Hank October 28, 2009 at 9:53 am

@Evolution – I could not agree less with your point of view in your post and in your comment. Whole life insurance is a horrible investment for almost every single person. Insurance should not be used as an investment or savings tool period. There are so many better opprotunities to use your money out there elsewhere. For most people, term life insurance is the best option and cheapest. Whole life insurance pays the highest commissions, and that is why salesmen push them so hard.

Evolution Of Wealth October 28, 2009 at 2:38 pm

I appreciate you commenting here and on my blog. I’ll refrain from doing so. My question is why didn’t you title your post “Term Life insurance is the best option and cheapest”? That’s what you are saying right? Now I’m not saying it’s the best place for everyone to put all their money. It’s a financial tool. It can be a very, very useful when used properly. That’s the key used properly. As I wrote in the post I previously mentioned, the problem with whole life insurance is that most sales agents don’t know what they are doing so they do what they are told. They sell whole life insurance at target premiums which leads to all the misunderstanding. I get that. I have to assume you understand what I’ve said so far and that it’s true because have presented no evidence to say otherwise.

Term Life Online November 25, 2009 at 4:29 pm

I feel the best option for life insurance is what really meets your life insurance goals. What are you trying to accomplish with your life insurance policy – that should be the first question for a shopper.

Then, also you want to consider how long you need coverage, what it will cost, what you can afford to pay, and the financial rating of the insurance company.

But, in many instances, if you are on a budget, have a family, or own a home, you may want to consider some king of term insurance in order to get the most protection at the lowest cost.

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