What's the difference between term life insurance and whole life insurance?

Term life insurance and whole life insurance are definitely different. In many ways the question boils down to what you are trying to accomplish with life insurance.

Term life insurance is totally concerned with providing for your loved ones if you were to die unexpectedly. It is aimed at replacing the income you would have provided for them over the next 20-30 years. That is what most people are trying to accomplish with life insurance. A “level term” life policy takes the price of the coverage for each individual year and averages it out so that you pay one premium through the initial term period (usually 20 or 30 years). If you die, the policy amount (for example, $500,000) is paid out to your beneficiary.

It is generally recommended that you have 8-10 times your annual income in a term life insurance policy, potentially more to make allowance for remaining financial obligations (ie a mortgage or kids’ college or that sort of thing). The basic idea, again, is that you don’t want to leave your family in a stressful lurch if you pass unexpectedly. Thus, when you reach a certain age there’s really no need to replace income.

Most term life policies (at least the ones we’d show you) allow you to keep the policy beyond the initial term period, but it would be rare to do that because the premium at, say, age 71 is very very high. Most term policies also have what’s called a “conversion privilege,” which allows you to convert the policy to a “permanent” life insurance plan (e.g. whole life insurance).

Whole life insurance is more of an investment product. This is life insurance that is designed to last until you die at whatever age, at which point it pays out the initial amount. Because the policy does accumulate cash value while you’re alive, you have the ability to borrow against that amount in the future. (But the cash value is not included in the death benefit if you die.) That’s the primary reason we call it an investment product. Dave Ramsey would tell you not to buy whole life because you can get a better return on investing that kind of money elsewhere (as in mutual funds). Whole life insurance is also a useful tax shelter for those trying to shield a large estate from estate taxes.

Where the rubber meets the road for most folks is in the price. Term life insurance is SIGNIFICANTLY less expensive than whole life insurance. Whole life is at least 5-10 times more expensive (a somewhat conservative estimate).

If you’d like to see personalized quotes on life insurance, please contact AC Forrest