Term vs. Whole Life Insurance: What’s Right for Your Family?

Term and whole life insurance both offer the same fundamental benefit: protecting your family financially should the unthinkable happen.  However, there are indeed many differences between the two policies – and depending upon your specific goals and needs, one may be better for your long-term financial health.

Term Life vs. Whole Life Insurance: Fundamental Difference

In the term versus whole life insurance debate, there is essentially one fundamental difference between the two policies: cash value.

With term life insurance, you only receive a “death benefit,” meaning that your family will only see financial benefits should you pass away.  Should you live beyond your specified term, then you will not receive any money back.

Whole life insurance, on the other hand, does have an inherent cash value.  Not only do you have the death benefit, but you enjoy a quasi-savings account as well.  Thus, should you not pass away, you often receive the premiums you pay back – and sometimes, depending upon how your policy funds were invested, you may receive more money back than you paid into the policy.  Given the cash value of a whole life insurance policy, you can also use it as collateral and take loans out against the policy.

Term Life vs. Whole Life Insurance: Price Disparity

Given the greater financial benefit of whole life insurance, you should expect to pay significantly more.  In comparing term versus whole life insurance, the latter typically costs thousands more.

For example, if you are a 40-year old male who does not smoke, and you are looking for a death benefit of $250,000, then you would pay approximately $3,000 annually with whole life insurance.  On the other hand, if you were to obtain the same benefit with term life insurance, your premium would be reduced to $350 annually.  This is a tremendous difference in your annual costs in life insurance!

Term Life vs. Whole Life Insurance: Which is the Better Deal?

Some people are uncomfortable with term life insurance.  It can be disconcerting to pay for decades for a life insurance policy, only to not pass away within the term, and therefore, not have a cent of benefit to show for the premiums.   For these people, whole life insurance is very attractive; if you don’t claim the death benefit, then you at least receive the paid premiums back.

Fundamentally, this may sound appealing, but it is important to take a look at the entire financial picture.  Indeed, with whole life insurance, they will “invest” your premiums, and therefore, you earn interest or dividends on your payment – making the entire process akin to a savings or retirement account.  However, would you financially be in a better place if you bought the cheaper term life insurance policy – and then invested the difference yourself?  The answer may be yes.

When you are comparing term versus whole life insurance, it is important to calculate the bottom line.  If you purchased a whole life insurance policy, as in the example discussed above, you would pay $3,000 annually and enjoyed a return of 5% in growth.  This is in contrast to a term policy, which costs only $350.  If you invested the $2,650 difference in savings between the rates of term versus whole life insurance into a mutual fund, you would enjoy a return of 10%.  At the end of 10 years, buying a term life insurance policy and investing the savings of $2,650 into a mutual fund would yield you $46,000.  On the other hand, if you bought a whole life policy, it would be worth only $30,000 in 10 years.   Thus, many financial advisors subscribe to the saying, “buy term and invest the difference.”

When you are debating between term versus whole life insurance, there are many different elements to explore.  However, if you are simply concerned with the financial bottom line, then choosing a term life insurance policy – and then investing the difference between the term versus whole life insurance rate – will yield greater long-term returns.