Request a Quote for:

Life Insurance Types: Whole or Term?

by Andrew Freiburghouse

If you are single with no dependents and have enough money saved to pay for your final expenses, you probably don't need life insurance, no matter who's trying to sell it to you. But if your story is a bit more complex--you're married with kids, for example--you probably either already have life insurance or are thinking of buying it. But maybe you're not sure what type of life insurance is right for you. This article is for you, with the more complex story and the questions.

Life Insurance on Your Terms
The gigantic selection of life insurance products is conveniently divided into two sections: term life insurance and whole life insurance. First, a look at term life insurance:

Term life insurance is fairly simple, as insurance goes. Policies pay benefits if and only if the insured person dies within the term of the policy. Terms range from one to thirty years. Term insurance costs considerably less than whole life insurance, and this is where the strategy of life insurance comes into play.

For example, you are expecting a big career move upwards within the next five years. But a right now your pay is good but not great. You live in a high cost area, New York City, and you are a single parent with a couple kids, so you have plenty of expenses to cover every month.

Maybe you decide to buy term life insurance with a seven year term, so you can get a lower rate and live comfortably in New York City in the present day, while still protecting your family's future in case something happens before you get that big raise. Smart move.

Good Old Traditional Whole Life Insurance
Planning to live to the ripe old age of 125 but still want your beneficiary to get a check when you go? Look into whole life insurance. It covers--you guessed it--your whole life. But despite its simple-sounding name, whole life insurance can be frightfully complex. With whole life insurance purchases, working with a professional insurance salesperson who understands the ins and outs of all the different policies can be really, really beneficial.

There are, however, some basic concepts to build upon. Traditional whole life insurance policies are characterized by a steadiness, both of benefit and premium. You pay your bill, you know what your benefit is, and both of them stay the same--for your whole life. One added benefit of a whole life insurance policy is that, unlike term life insurance, it has a cash value (called a surrender value). You can borrow against it or even sell the policy to someone else.

New-Fangled Versions of Whole life insurance
These days, traditional whole life insurance is not the only type of whole life insurance. You can also buy a universal or adjustable whole life policy. This option will allow you to increase the death benefit if you pass a medical exam.

Or you can buy a variable life insurance policy. Its main distinguishing characteristic is that it's more like other investments. For instance, premiums can be used to purchase stocks and bonds.

Variable-universal, the last of the major variations on whole life insurance, is a hybrid type that combines elements of universal or adjustable policy with elements of a variable policy.

Life Insurance Is About You and Your Loved Ones
The type of plan you choose depends on your objectives. If your main priority is protecting your dependents from financial hardship, term life is a relatively inexpensive way to achieve this. Term life insurance can also be part of estate planning, with the benefits earmarked for the payment of estate taxes.

The chief benefit of whole life insurance is often that it does force you to save money for retirement. However, as an investment device, many experts feel that most whole life policies don't provide the highest rate of return you could get. Your best bet for whole life insurance purchases is to enlist the help of a good agent and find coverage with a decent internal rate of return.

Insurance Information Institute

About the Author