Term Life Insurance Versus Whole Life

Term life insurance versus whole life: which is better?  The two policy types are designed to address needs of differing time frames.

• Whole Life  – permanent coverage to address the “When” in life
• Term Life  – temporary coverage for the “If” in life

The answer also depends upon your risk tolerance, ability to stick to a financial plan, and your health over time.  You may have heard the phrase “buy term and invest the rest”.  On this page you will find reasons why people make this statement, and some considerations for why you might do otherwise.

Term life insurance addresses the "IF" in life. Term life makes the most sense when the need for coverage will disappear at some point, such as once college expenses have been put to rest. It addresses the question of: "what if I die before paying for the kids’ education?", or "what if I die with no assets for my spouse to draw upon?"

Term life provides a larger death benefit for your premium dollars when compared to whole life.  There are two reasons that your death benefit will be higher:

Your term life premium buys a death benefit only, whereas a portion of your whole life premium goes to build cash value over time. 

You will probably outlive the term of your policy, meaning the odds of the insurer paying a claim are much lower than with whole life insurance: a permanent policy.

Whole life insurance is designed to be permanent coverage. It is intended for the "WHEN" in life: when the kids finish paying for college, when I retire, and when I die. Cash value policies are designed to be in place when these events occur.

The cash accumulation inside a whole life policy can help cover college expenses or fund your retirement while simultaneously providing security in case you die before reaching these milestones. 

Start a whole life policy when your child is born, and allow for twenty years of cash value to accumulate inside the policy on a tax deferred basis. If you die early you have covered a portion of the college expenses, or you can borrow against the policy cash value without needing a credit check. 

When you reach retirement age there will be cash value inside your whole life policy. You can cash out the policy to fund retirement expenses, take a loan, or continue with the policy.

When you die your whole life policy will pay the death benefit to your heirs.

Whole Life can be less expensive over the course of your lifetime than buying a series of term life policies. Term life becomes very expensive as we age, and often is not available to people in older age brackets, or with health issues. 

The term versus whole life insurance debate often boils down to can you make the “buy term invest the rest” argument work for you. Term life is the best fit for you depending upon your risk tolerance, ability to stick to a financial plan, and how healthy you can stay over time. 

Term life combined with a displined investment strategy will often provide a greater internal rate of return than will whole life. Unless of course you are risk adverse, fail to make regular investments, or become disabled. 

Risk tolerance is also an important component in the term life or whole life debate. When you invest the rest, you are investing in stocks and bond – securities that may be higher in risk and subject to market volatility. Whole life provides a guaranteed rate of return. Whole life is a more conservative option over time.

Consider also your ability to stick to a financial plan. Buying term life and investing the rest makes sense if you actually make the investments. But many people lack the discipline to regularly put money aside into investments. It sounds great in theory, but often falls apart in practice. Whole life comes with a penalty to motivate otherwise undisciplined people – the policy will lapse if you don’t continue making premium payments. 

The strongest argument supporting whole life versus term life is your ability to stay healthy over time. If you choose to invest the rest, what happens if you get sick or hurt and become unable to work?  For most people the answer is “I stop making periodic investments because my income disappeared”.  Whole life allows you to purchase a waiver of premium rider, which will continue your policy if you become disabled. Your investment advisor won’t do this for you.