Term Life or Whole Life?

Term life insurance covers a person against death for a limited time period or the term (1, 5, 10,15, 20, 30 yrs). For example, the term might be until children are grown, the house is paid for or until retirement. You pay the premiums for the policy period and at the end of the term, the contract or policy expires. If no claims are made against the policy during the term, you don't receive any benefits after the policy expires, just like auto or homeowners insurance.  There are also companies that offer a term policy with a return of premium built in.  They are slightly more expensive but offer the guarantee of all your premiums returned to you.

Whole life insurance is permanent and does not expire (assuming you continue to pay the premiums). It provides coverage similar to term life insurance, but it also provides an investment vehicle. A portion of the premium goes for life insurance, while the rest goes into an investment account. This account can be either an interest bearing account or a variable (stocks and bonds) investment account.  Other names for whole life type policies that have a cash accumulation are variable or universal life.

Which is better (our opinion)? Young families with large financial obligations are usually better off with term life insurance policies. The substantially lower premiums enable them to purchase sufficient coverage to protect against loss of income, which is the greatest need. Any additional dollars can be invested in other vehicles (mutual funds, annuities, or money market funds etc.) that have the potential to generate equal to or better returns than life insurance policies. Whole life insurance is often purchased by people for tax and estate planning purposes and can under certain circumstances produce a tax-free income.  Certainly if you want to make certain that you have coverage when you die then universal life is the best bet.

About Life Insurance

Paying for life insurance hurts! But few can do without it. The key is to buy life insurance only for losses that you can not replace, such as your income. Avoid narrowly defined life insurance policies that only cover specific loss of life, such as accidents, plane crashes or cancer. You're better off with insurance for any loss of life for a small increase in premium.

Don't skimp on life insurance. But remember that people with no dependents may not need life insurance policies at all. To estimate the amount of a life insurance policy, estimate your dependent's living expenses if your income is no longer available. Most life insurance consultants estimate five to ten times your annual income. Smoker life insurance costs two to three times as much as non-smoker.