Whole vs. Term Life Insurance

You want to protect your family's financial needs with Life insurance — but you don't know which type of policy is for best you. Learning about the basic types of Life insurance can help make your choice much clearer. Simply put, there are two basic types of Life insurance:

Term Life insurance, where the policy pays off only if you die during the duration of the policy. If you do not die during that period, there is no payoff.

Whole or Permanent Life insurance, which pays out when you die. It's more complicated than that, of course.

In looking at Term Life insurance, you are insuring a period of time in your life, when you know your family will have big expenses — such as a mortgage or college tuition. Term Life is a way to cover those eventualities should you die unexpectedly.

With Term Life insurance, generally you pay a low monthly premium based on the term length and amount of coverage you choose. You can choose term lengths such as 10, 20 or 30 years, and coverage amounts anywhere from $100,000 to several million dollars. Here are a few additional features of Term Life insurance:
  • With Term Life insurance, you can invest your money yourself, rather than having an insurance company do it for you. As a rule, insurance companies often are very conservative with how they invest your money.
  • Term Life insurance is good for short-term needs. Two good examples of this are to cover your children's college education, and to cover your mortgage. Parents could buy a policy that expires after their children graduate from college, to ensure that the full education is paid for in case anything happens to the parents.
  • Term Life insurance is often recommended for families that and are on a limited budget, since Term insurance premiums can be less expensive than other types of Life insurance. That's because the insurance company pays out only if you die during the term period, which the company perceives as a lesser risk.

On the other hand, Whole Life insurance policies offer a pool of money known as cash value that builds interest over time. The interest earned is based on the performance of the stocks, bonds, and mutual funds in which you choose to invest the premium. Although you are able to borrow against a policy's cash value, there are often tax penalties to be considered. Whole Life insurance can be expensive because of this investment aspect, and because the insurance company pays off no matter when you die. There are different types of Permanent Life policies:
  • Ordinary or Whole Life is most common type of permanent insurance. The premiums and death benefit generally remain constant over the life of the policy.
  • Universal or Adjustable Life offers you flexibility in both premium payments and the death benefit your family receives. You can adjust the death benefit and your premium payments, within certain limits, to fit your financial situation.
  • Variable Life policies have a value tied to the performance of financial markets. The death benefit and cash value fluctuate with the performance of the investments you select. Some policies guarantee that the death benefit does not fall below a minimum level.
  • Variable-Universal Life policies combine features of Variable and Universal Life policies.