How do I think about buying term life insurance versus whole life insurance?

February 19, 2013

Advisor answers

If you are young, and/or are looking at life insurance as a means to replace your income in the event of a premature death, then term life insurance will be the most effective and inexpensive way to do that.

Whole life has a couple of issues:

First, the "returns" you get can be muted because of the current investment/interest rate environment. And second, it is going to take much higher premiums to see the same level of death benefit.

Permanent insurance (such as whole life) is better suited for estate planning applications where you nee...

James Dowd

James Dowd


I suggest that you think about it like this: term life insurance is like an option ~ you pay an an up-front premium and receive a benefit payment if the person dies during the coverage period. Whole life is like an option packaged with a series of zero coupon bonds, with some embedded tax benefits.

The economics of most whole life policies can be replicated using a combination of term life and financial instruments, at less substantially less cost.

For most people, term life is a much better deal. Pricing is tr...

Christopher Arnold

Christopher Arnold


Think about term life insurance as 'renting' and whole life insurance as 'buying'. I say this because you build no equity in the form of cash value in a term policy. When the term is over (and the policy holder is still living), the coverage ends and there is nothing to show for the premiums paid into the policy. But, in a whole life insurance policy, you build equity in the form of cash value that can become a valuable asset in your overall financial plan. It takes a while to build up cash value however whole life policies can build ...

I reread your question several times as I wanted to be certain as to the answer you are looking for. You asked "How do I think about buying term llife insurance vs. whole life insurance". Christopher's answer addressed this question, but the other two did not. You didn't ask "should I buy" or "is whole life insurance a good buy". So here is how I work with clients to answer this question. We can't cover all the considerations due to space limitations here. I will try to hit the major points.

First and foremost, if you are looking at ...

John Buerger

John Buerger


The best way to "think" about life insurance is to try to match the coverage you are buying for the need it might have to fill.

As Roger suggests, ask yourself the question, "if I die (tomorrow / next year / 10 years from now / 40 years from now), what do I want to have happen for my family / loved-ones / business partners?"

The answer to this question will define the scope of the coverage. If money is needed for 25 years to pay off debt, then a term policy of that length and the amount of debt does the job. If money would be needed to ...

Term is the bare minimum tax expense. It is specifically designed to cover a period of years that are most important in your earnings and savings. For example, I purchased a term policy when my daughter was born for 20 years. By that time she should be into college and not relying on my income or finances as much. At least I hope :)

Whole life is a form of forced savings. They will put you on a schedule to pay premiums for the remainder of your life that equals your death benefit. So if you live a fu...