Whole vs. Term Life Insurance

April 08, 2010, By Jeff Waddle 0 comments

No one likes to think about the day we call it a life but when your loved ones are depending on you, it’s sometimes necessary. That’s when the issue of life insurance comes into the picture. Life insurance can provide your family or spouse with an important financial safety net if you die but with so many options out there, how do you choose what’s right for your unique situation?

It’s not an easily answered question but to even start the decision-making process, you need to be at least somewhat familiar with the differences that exist in various life insurance policies and what it could mean to you.

The Big Four

There are essentially four basic types of life insurance to choose from, and three of them are variations of “permanent” policies. We’ll start with the one that’s not.

• Term life insurance pays your beneficiaries the face amount of the policy upon your death (the death benefit), and it covers you for whatever timeframe you have decided upon. An annual renewal term life insurance policy requires that you pay the premium annually to continue coverage, and premiums generally increase with your age. Level-term insurance can be purchased in blocks of years (10, 20, etc.) and the premiums remain unchanged throughout the length of the policy. To avoid having to shop for a new (and likely more expensive) policy if you get to the end of your term and still need life insurance, you may want to add a guaranteed renewal option to your term policy. This renewal option will give you the right to continued coverage without having to undergo a qualifying medical exam. Term life insurance typically offers lower premiums—at least initially—than permanent policies, and it is a good choice for men who want to provide some death benefits to their family at a reasonable cost. Many companies offer their employees modest term life insurance coverage as part of their overall benefits package.

• Whole life insurance adds an investment or savings element to the concept of term insurance. Your premium covers the cost of insurance (also called the mortality charge) as well as a certain amount beyond the insurance cost (called the reserve) that earns interest at rates that will fluctuate with economic conditions and market returns. While certainly more expensive than term insurance, whole life can accumulate a cash surrender value over the years that is payable in cash or payment of future premiums payments if you decide to cancel or surrender your policy. You also have the option of borrowing against the cash value if the need arises. In a typical whole life policy, the mortality charge increases with age while the reserve portion of the premium decreases.
• Universal life insurance is a variation of whole insurance. It also offers a mortality charge and savings vehicle (the accumulation fund) in its premium. Flexibility is part of Universal’s appeal because you can choose to pay only the mortality charge in leaner years while funding it more fully when times are good. As the accumulation fund earns monthly interest over the years, you have the option of using it to pay your entire premium. You have the option of withdrawing your savings as well, but you may face surrender charges if you drop the policy entirely.
• Variable life insurance is yet another permanent insurance option that combines funds for savings with mortality charges as part of its premium package. The key difference is that Variable life provides various investment alternatives that are typically managed by the insurance company. Similar to mutual funds, these investment vehicles are subject to the same profit/loss risks that other portfolios face in the volatile financial markets.

Final Thoughts

Each of these four basic types of life insurance can included additional features and options that may vary by company or your unique circumstances, so more research and a discussion with a trusted insurance agent is highly advisable.

Your ultimate decision on the type of life insurance policy to choose could hinge on your age and health. While term insurance premiums for healthy men under 50 likely will yield your highest basic death benefit for the money, term policies get a lot more expensive beyond that. And, you may have to qualify medically for coverage which could spell higher rates if you smoke or have other health issues.

Whole, Universal or Variable policies generally are not considered a good investment unless you plan to hold onto them for at least 20 years. That’s because it takes many years for the reserve funds to accumulate healthy cash values and make the higher premiums associated with these policies worth the cost. Many financial planners believe you’d be better off by simply buying a term policy and investing the money you’d save by avoiding “permanent” insurance premiums.

Insure.com maintains a database of leading insurance providers as well as a life insurance needs estimator tool and other information on life insurance options. Whatever the cost of life insurance turns out to be for you, consider it in relation to the value of peace of mind you’ll have upon knowing you have provided for your loved ones.

Jeff Waddle is a featured contributor to ManoftheHouse.com.