Whole Life vs. Term Life Insurance

One of the most popular questions I get asked is, “What is the difference between whole life insurance and term insurance and which do you recommend?”.  Both types of insurance can and will protect your family in the event of your premature death but there are a couple of key differences.

Whole life insurance is permanent insurance.  As long as you are paying the premiums, the insurance will remain in force.  With this permanent policy comes a cash value aspect. A portion of your premium would go to pay for insurance and a portion would go to fund the cash value.  It is possible that at some point your cash value could grow to be big enough that you could stop paying premiums. In this case, the cash value would be used to fund premiums and your insurance would remain in force.  

Term life insurance is exactly what it sounds like.  It is insurance that will be in force for a specific term whether that be 10, 20 or even 30 years.  Once that time period is up, the insurance no longer exists. This insurance is cheap and easy to understand when you compare it to other insurance products on the market.  

I carry a term life insurance policy equal to ten times my annual income.  If you bring home $50,000 a year, this would mean you would require a $500,000 life insurance policy.  To get this type of policy in whole life coverage would be entirely too expensive to carry. Because whole life insurance policies guarantee to pay out until death, along with the accompanying cash value, they are much more expensive to maintain.  

I decided to buy term insurance and invest the difference.  Essentially, you would pay for term life insurance and invest the remainder of what that would cost you in whole life coverage.  For example, a 30 year term policy for a healthy, 30 year old is around $380 per year. The equivalent in whole life is $4,000 per year.  If you decided to buy term insurance and invest the difference of $3,620, it would equal $1,055,479 after 30 years! Under this approach, if you have made the commitment to become debt free, you could be self insured by the time your policy expires!  However, the key to this approach is that you actually have to invest the difference. Notice I did not say, get term life insurance and use the savings to go shopping or take a nice vacation.

Ultimately the choice between whole and term insurance is up to you.  But it is better to make an informed decision, instead of allowing insurance salesman to confuse you into buying a policy that you do not understand.  It is very possible to get the coverage you need without breaking the bank!


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