Term Life Versus Whole Life Insurance
How is term life insurance different from whole and which is the right selection for you? That's a key question to answer right away before going any further. Let's compare the two in layman's terms and see why term offers many advantages over whole life...the primary one being considerable lower premiums.
"You get what you pay for" doesn't really apply when comparing term life and whole life. Or maybe it does. Whole life is a very different animal in that the carrier will definitely pay out some amount of money as long as you keep the policy in effect. There's usually a smaller amount of life insurance benefit from the start and then you start to build "cash value" as an add-on to the base term life benefit. Whole life is very expensive when compared to term life insurance so the amounts a person is able to afford is typically much less. Unless you are willing to pay quite a large amount in premium, purchasing enough protection can be an issue for most people. As we addressed in our article on how much life insurance coverage to purchase, the financial responsibilities and income replacement needed for most families would be hard to address with a whole life policy unless you are willing to pay a significant amount in premium.
The reason for this cost is that whole insurance doesn't really fit the model of insurance. Insurance, by definition, is a device to spread the improbable risk that might wipe one individual and spread among a larger number of people. When done correctly, each person pays a premium to offset the total risk for the group. Whole life is not this. With whole life, every member of the risk group will trigger their benefits, albeit at different times. The carrier basically needs to invest the premium amount and make enough money for a long enough average period to pay out the benefit to everyone and make a profit. This structure is probably more akin to a mutual fund with some added life benefit up front in case. It's hard to make an argument for this. A better approach is to buy a much larger term life benefit at a fraction of whole life cost and invest the difference if you like. That's essentially what the whole life carrier is doing but with an added margin at your expense. It's hard to see how whole life benefits anyone besides the brokers and carrier when you analyze the dollars over the long term.
Term life insurance is true insurance. At it's core, you are protecting against the risk of death for a fixed period of time and for a fixed amount. We address the concerns to look at when choosing your term length period of time but the key is to address the years that financial responsibility falls hardest and "replace lost income" during that period and/or address financial/debt liabilities such as mortgages, loans, credit cards, etc. This method is significantly less expensive than that of whole life insurance.
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