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How Does Whole Life Compare to Term Life Insurance?

Oct. 29, 2014
Life Insurance
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Buying life insurance helps to make sure that your spouse and children will be financially comfortable if you die. Since there are several different types of life insurance policies, it’s important to know which is best for you.

Whole life insurance versus term insurance

Once you’ve decided that you need life insurance, you’ll probably end up choosing between the two most popular variations: term life insurance and whole life insurance, which is sometimes called “cash value life insurance.” All of the best life insurance companies sell both types.

If you opt for term insurance, you’ll be covered for a specific period of time (usually 10-30 years) in exchange for a premium that you pay either monthly or annually. If you die in that time, your beneficiaries (spouse and children, for example) will receive the so-called death benefit, which is the official — and, yes, somewhat grim — term for the money they will receive from your insurer.

Whole life insurance, on the other hand, guarantees a lifetime of coverage for which you would also have to pay monthly or annual premiums. You can expect this kind of life insurance to be pricier than term insurance because it also serves as a kind of savings account, where you can earn interest, too. Because of this additional feature, the premium for a whole life insurance policy can be four to eight times as expensive as a term insurance premium.

Which policy is best for me?

If you’re young, but have children or simply don’t have much disposable income, you’ll probably want to consider term insurance. Just be aware of its main drawback: If you don’t die in the predetermined time, you’ll have paid years, if not decades, of premiums without a tangible benefit for your family.

» COMPARE: NerdWallet’s life insurance comparison tool

But a situation like this simply won’t arise if you opt for whole life insurance. With that type of policy, you at least have the satisfaction of knowing that a safety net is in place for your family in case something happens to you.

If you still can’t decide between these policies, it may be best to buy a term insurance plan with a term conversion rider, which would let you convert your term policy into a whole life insurance policy down the road. Although adding this rider to your policy typically costs more, it would certainly be valuable if you outlive your term insurance plan.

What about variable and universal life insurance?

You may have heard about universal and variable life insurance, two policies with additional flexibility when it comes to paying premiums and deciding where to invest your money.

Although these policies shouldn’t be dismissed, some financial experts believe that life insurance’s primary purpose should be to take care of your family in the event of accident or illness. In other words, insurance should insure — it shouldn’t act as a second investment portfolio.

“I am a firm believer in life insurance as life insurance, not a tax-advantaged investment,” says Jeffrey Cortright, a financial advisor.

Whatever route you take, it’s important to explore all of your options before deciding on a life insurance policy and to take the time to read the fine print, so that there aren’t any unwelcome surprises down the road.

Family with life insurance image via Shutterstock.