Term Life Versus Whole Life

Internet articles on this subject are heavily biased. Most authors with a bias prefer term life in most situations. However, I will try to be as unbiased as possible in my comparison of the two products.

What is Term Insurance?

The phrase "term insurance" can be thought of as shorthand for "terminating insurance." In other words, this insurance isn't meant to last indefinitely. The more precise reason for being called term insurance is because of its term limits. The term limit is the number of years before the policy ends its guaranteed premiums. In other words, the insurance company promises not to increase your premiums for the length of your term. Once a term limit is reached, all bets are off. Insurance companies can then jack up the price with each renewal. Most people do not keep their term policies for very long after reaching a term limit because of drastic price increases. To be fair, the price increases do not start off very dramatic, especially if the insured person is still fairly young when the term limit is reached. Term limits are generally provided in multiples of 5, and they can range from 5 years to 30 years (there is also a 1 year term). Shorter term limits are cheaper because there is less risk to the insurance company. Even if people want to keep renewing their term policies, there is an age at which the policy automatically cancels. This age varies widely depending on the company. For some companies the age of cancellation can be as young as 65. For other companies it can be as old as 95. If you want to buy this policy, make sure to ask your agent about riders. Riders provide important enhancements to a policy. Perhaps the most important rider is the "waiver of premium for disability" rider, which makes the insurance company pay your premiums if you become disabled. There are many more riders to talk about, but that goes beyond the scope of this article. Some of these policies can even be converted to a permanent policy without any underwriting questions.

What is Whole Life?

Whole life is permanent coverage; it is designed to keep going for as long as you live. In fact, this type of policy even has temporary protections in place to keep it from cancelling if premiums aren't paid. Whole life never goes up in price and never cancels due to age. Whole life accrues cash value. Without getting too technical, cash value is responsible for keeping premiums at a constant level in a whole life policy, and it also provides the funds to keep a policy going if premiums aren't paid. You can even take out a loan against the cash value in a policy, although I highly discourage low income people from doing that (I'll explain in a later article).

What's the Difference?

Whole life is permanent and term life is temporary. Whole life has the benefit of cash value and term does not. Term life generally starts off cheaper. The price of whole life never goes up, but the price of term life goes up with each renewal.

Which is Better?

I think the public wants agents to take sides and declare one product better than another. That shouldn't be done, however, because the suitability of a product depends on the circumstances. Term insurance is most suitable as a protection against lost income. Whole life helps the most with final expenses (funerals, burials, probate cost). I would go so far as to say term life is unsuitable for final expenses. With all the biased articles saying term life is better, whole life is probably being underutilized. Many people who eventually purchase whole life after leaving their term policy wish they had purchased whole life when they were younger and the rates were more affordable. It doesn't have to be one or the other. Having both types of insurance at the same time is a good strategy.