Term Life Insurance Vs. Whole Life Insurance - What Gives?

Life insurance is regarded by many to be one of the most responsible forward-thinking investments that can be made by young families. When disaster strikes on a family without life insurance, the financial burden can be devastating. Funeral expenses are just the tip-of-the-iceberg in many cases, as many overlook the carrying costs associated with daily living and debt management. Compounding the above is the loss of income and often benefits which is common in these situations. Forget about vacationing in Los Cabos; most families without life insurance who live through the death of a parent have difficulties just maintaining everyone on a healthy diet. Since life insurance is the easiest way to mitigate the impact of such a situation, the question arises: What kind of life insurance is best?

Each person's financial plan is unique. For that reason, it's impossible to say that one type of life insurance coverage is always superior to the other. With that in mind, we'll provide an overview of term and whole life, including the strengths and weaknesses of each product. This should provide you with a broad base if background information from which you can ultimately make your decision on which product suits your situation best.

Term And Whole Life In A Nutshell

While there are several nuances that are dissimilar between term life insurance and whole life, all spring from one overriding difference: a forced savings option. Term life is a temporary policy that pays a cash value upon the policyholder's death. Often, the policy is renewable each year with gradually rising premiums. Other times, the contract "levels" the premiums for a defined period (e.g. 5, 10, 20 years, etc.).

Whole life insurance blends a cash payout with a forced savings option. This latter feature is often promoted as an investment vehicle. The value of this option is based on a basket of underlying securities, which can include bonds, stocks, and other instruments. Over time, the value of the investment portion rises, allowing you to borrow against it.

The Problem With The Investment Option

Initially, the investment feature (or forced savings option) seems attractive. A portion of your premiums is automatically allocated toward the investment piece, which rises in value. However, the rate of return most policyholders realize is rarely, if ever, competitive with alternative investment vehicles. A low-end mutual fund will usually outperform the basket of securities underlying the whole life contract.

Making matters worse, most of the data that would reveal this disadvantage is hidden from the policyholder. This happens for two reasons. First, it is nearly impossible to determine the percentage of your premiums that is allocated to the investment portion. Second, lofty fees and commissions can obfuscate the matter further. They're often equal to the aggregate premium you'll pay during the first year.

This does not indicate that full life assurance is always a poor choice. There are times when such a policy may be appropriate.

When A Whole Life Policy Makes Sense

One of the reasons many people choose whole life over term insurance is because the former does not require you to submit to a medical examination. That should raise a warning flag. The insurer is willing to abandon caution and extend coverage to a person who may have an existing medical condition. Life insurers usually do this because of the tremendous margins they build into these products. That means you'll pay more for the coverage.

Whole life can also be appropriate for those with substantial wealth who carry the contract for decades. The cash value of the investment portion combined with the payout upon death can be used to settle their estate taxes.

Is it worth switching Life Insurance Products?

Suppose you already have a whole life policy and are now wondering whether term insurance is more appropriate for you and your family. Should you switch? It depends. There are some important considerations you should first deliberate.

First, you'll need to consider your policy's cash value (it's often called a surrender value). This is the amount your insurer will pay you if you decide to terminate your contract prior to its maturity. After compensating service costs and commissions the cash value is negligible for the first ten years of a policy. If you terminate a policy during your eighth year, you'll receive very little compared to the amount you paid in premiums.

Second, your insurer will probabably require the results of a medical exam before considering you for term life insurance. If you're a habitual smoker, suffer from existing health conditions, or are over the age of fifty, a term policy may not offer significant savings.

Bottom line: review your situation and investigate your options. In many situations term life insurance makes the most financial sense. That said, as mentioned, each person's circumstances are unique. Your first step is to identify which type of coverage is suitable for you and your family. Then, shop for life insurance rates online to compare reputable insurers side by side. You'll find that doing so can help you save a significant amount of money.

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