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Term vs Whole Life Insurance: Weighing the Pros and Cons

Buy Term and invest the difference. That is a maxim that was used for years by a well known insurance company to motivate people to buy term life insurance rather than the more expensive Whole life. Most people don’t hear the phrase any more, because in many cases it was not a viable solution. Term Insurance is very inexpensive. However the average person who bought term life in their 20s and 30s simply spent the difference rather than making any attempt to invest it.

If you are looking for life insurance, be sure to check out our pre-selected companies for quotes that fit your need. And while you are waiting for your quotes, continue reading to get a better understanding of your choices.

Let’s take a look at the real difference. First, we need to define “whole life.” It means exactly what you would expect, your life insurance policy is good for as long as you live. You pay premiums to age 100 or to the year of endowment, whichever comes first. Endowment simply means the cash value of the policy has grown to equal the death benefit. Many companies will pay off the entire value when that point is reached while others will simply allow the interest to keep building, resulting in a benefit that exceeds the original face value.

When you purchase whole life, you want it to be affordable, not necessarily cheap. You also want to be alert for variations of whole life, such as “modified” whole life, which will have increasing premiums, and “graded benefit” whole life, which only returns the premium during the first two to four years, depending on the contract. (Graded policies are good policies, especially for those who are not medically qualified for any other kind of insurance.) If you want whole life, you want “level” premiums, meaning they will not change during the life of the policy.

Term life insurance on the other hand, typically has a lower premium cost than whole life but is only for a period of time, say 1 or 20 years. The most important element of term insurance is the Term itself—meaning the number of years you can own the policy before it converts to annually renewable. You will see lots of TV advertising with irresistible numbers, but look closely. Most of the TV advertised policies are only ten year polices, and some are only five. If you are under age 50, it is possible to purchase a Term policy that will be level for 30 years, so why get something you’re going to have to replace in only 10 years?

So why do people have Term policies that say they are “renewable to age 95”? Many people think they have a term policy to 95 because of that statement on the first page of their policy. However, once the initial term has expired, the policy converts to “annually renewable.” In other words, while you can keep it, the premium will go up dramatically each year. If you choose to pay that increase, you are automatically “renewing” the policy.

have a need for a very high face value—say 250,000 to $500,000. They may have a large mortgage or business debt that they want covered in the event of their death. Generally, when they reach retirement age, those debts will be paid, and they will no longer need such a large benefit. In that situation, a Term policy may be a perfect fit.