What's the difference between Term and Whole Life insurance?

Question

How would one decide which is most appropriate? Are there tax or benefits differences that one offers over the other?

Answer 1

Whole life insurance accumulates a cash value on a pre-tax basis. With a paid-up policy, you make payments until a particular age (usually 65 or 70), at which point you are insured for the rest of your life or a very old age like 120.

You can also access this pool of money via loans while you are still alive, but you reduce your benefit until you repay the loans. This may be advantageous if you have a high net worth. Also, if you own a business or farm, a permanent policy may be desirable if the transfer of your property to heirs is likely to generate alot of transactional costs like taxes. Nowadays there are probably better ways to do that too.

Whole life/universal life is a waste of money 95%+ of the time. An example, my wife and I were recently offered open-enrollment (no medical exam) insurance policies our employers in New York. We're in our early 30's. I bought a term policy paying about $400k which costs $19/mo. My wife was offered a permanent policy that pays $100k which costs $83/mo, and would have a cash value of $35k at age 65.

If you invested the $60/mo difference between those policies and earned 5%/year with 30% taxes on the gains, you'd have over $40k with 4x more coverage.

Answer 2

Whole life is life insurance that lasts your whole life. Seriously.

Since the insurance company must make a profit, and since they know they will always pay out on a whole life policy, whole life tends to be very expensive, and has lower "death" benefits than a term policy.

Some of these policies are "paid-up" policies, meaning that they are structured so that you don't have to pay premiums forever. But what it amounts to is that the insurance company invests your premiums, and then pays you a smaller "dividend," much like banks do with savings accounts.

Unless you are especially risk-averse, it is almost always a better decision to get an inexpensive term policy, and invest the money you save yourself, rather than letting the insurance company invest it for you and reap most of the benefits.

If you are doing things properly, you won't need life insurance your whole life, as retirement investments will eventually replace your working income.

Answer 3

For most people Term is the way to go. I consider life insurance a necessity not an investment.

See this article on SmartMoney.

Answer 4

Just to add to @duffbeer703 comment, additionally, the cash value is NOT part of the death benefit. The policy is intended to grow the cash value to the point where it matches the death benefit and then it 'matures' and you get the cash.

My point being, is that since they don't give you both, you are really transferring the reponsiblity from them to you over time, your savings (that you lose) becomes part of the death benefit and they supliment it with less and less over the years so that it would equal the death benefit.

@duffbeer703 nailed it right on the head, buy term and invest the difference and once you've got your savings built, really the need for insurance isn't there any longer (if you've got 1/2 million saved, do you really need insurance?)

Answer 5

Term life insurance is just that - life insurance that pays out if you die, just like car insurance pays out if you have an accident. Like car insurance, it's easy to compare amongst term life insurance policies - you can even compare quotes online.

Whole life insurance is life insurance plus an investment component. The money that you pay goes to pay for your life insurance and it also is invested by the insurance company. Insurance companies love whole life because it is not a commodity; they can come up with a large variety of variants, and that fact plus the fact that it combines insurance and investment means that is very difficult to compare policies. Not to mention that fact that none of the companies - as far as I can tell - publish their whole life insurance rates, so it is very difficult to shop around.