What's the difference between Term Life & Whole Life Insurance?

Buying life insurance is confusing enough without all the jargon. Which is better? Term Life Insurance? Or Whole Life? What's the difference? Which is the best for you? Let's break it down.

Term Life Insurance Policies VS Whole Life Insurance Policies

Term life insurance is very simple. You buy the policy, and the policy pays your family if you die. If you live, your family gets nothing. For this reason, these policies tend to be very inexpensive.

Whole Life insurance also pays your family if you die. However, with whole life insurance, you also get a savings account with it, so if you live, you get at least some of the money you put into the insurance policy back. You can either cash in the policy or borrow against it. For this reason, whole life is more expensive. Usually, however, there is a higher cash value since more money has been paid in, and the cash value has earned interest or dividends.

Which Insurance Policy Type is Best?

Well, that depends. If you do not believe you will have the policy more than 10 years, term life insurance is your best bet. If you believe you will have the policy more than 20 years, whole life insurance is probably the way to go. In between? Well, then, you'll need to ask your financial planner which way to go. They will need to run a term vs. whole life analysis for you.

Term Life Insurance

Term life insurance is relatively simple: you buy a term insurance that stops after 10 or 20 years, or one that can be continued until age 70 or later. You can have the amount you pay in increase each year -- called an annual renewal term -- or be a fixed rate.

Whole Life Insurance

There are three types of whole life insurance:

  • traditional whole life insurance;
  • universal life insurance; and
  • variable life insurance.

Traditional whole life insurance has the most guarantees and is the least risky of the three.

If you are a conservative investor and also have trouble saving, traditional whole life makes sense. If you need premium flexibility especially in the early years of the policy, universal life is for you. And if you consider yourself a knowledgeable and risk-accepting investor, check out variable life. It may be that you cannot afford all the permanent insurance you have decided you need, so consider a combination term-plus-permanent policy.

Avoid all the fancy riders except perhaps the waiver of premium, which suspends your premium payments and keeps the policy in place if you become disabled.

As always, it is best to contact your financial planner to determine the right life insurance for you.