The difference between Whole and Term life insurance explained

Written by
Peter Dunn
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The seemingly age-old question. Discussed and debated on just about every single financial site, and I've managed to avoid the topic for many years. But, I'm feeling equanimous today.

I'll begin by saying I don't like to speak in absolutes, but I can say one is not better than the other. A lot of people are Team Whole Life or Team Term Life, and they then proceed to fight for their team with their every breath. I'm not into this. The way I see it, both types are viable options.

But most importantly, focusing on this question is the wrong emphasis when it comes to life insurance. Sure, the type of life insurance you purchase is a big decision, but when you determine you are going to buy life insurance this isn't the first question to ask yourself. The most important question to ask is how much life insurance do you need? The face value of your life insurance is the MOST important factor.

Let's start with your income. How much gross pay do you make each year? Let's say it's $100,000. You need 10 times your income in life insurance, so for this example you'll need one million in life insurance coverage. Why so much? Not so your partner can live it up after your gone, it's to replace your income. Because when you pass, so does your income. Your partner will use the life insurance funds to create balance in their financial life during a chaotic time.

But to get to your question, there are pros and cons to each of these types of life insurance. Let's go through them.

Pros - Term Life:

- A more affordable option, more coverage for less per month.

- You can match up your need for coverage with policy length. For example, you may only want coverage until your youngest child graduates from college.

- You can also do a "conversion," meaning you can convert your term policy to a permanent policy if you so choose. Keep in mind, the cost will be associated with your age at the time of conversion, though mercifully it will still be based on your health at the initial point of purchase. This is helpful if you become ill and want to continue your coverage, whereas if you didn't have life insurance prior to getting ill, coverage will be harder to secure.

Cons - Term Life:

- It ends. And worse case scenario, you can't get coverage again due to age, illness, or lack of funds.

- You're essentially "renting" term coverage. When your policy ends, that's it. There is no equity in a term policy. Though there is a type of term called return of premium term. It's twice as expensive as term, but when it expires you get all your premiums back.

Pros - Whole Life:

- The majority of your premium goes to insuring you, but a portion goes into a separate account. This portion grows and builds up a cash value, which you can then borrow against (tax-free). I'm not suggesting this is a great idea, I'm just stating it as a pro.

- Premium doesn't generally increase over time.

Cons - Whole Life:

- It's more expensive than term. Back to the original example, if you need a million dollars in coverage, a term policy could cost around $50 a month and a whole life policy could cost around $500. Whole life can be unaffordable for many.

- The policies aren't as flexible as they are often sold as. Make sure you fully understand your policy.

There you go. Take these pros and cons and use them to help make your decision. Best of luck! Oh, and speak to your insurance agent.

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