Life Insurance Tradeoffs

Term Life Insurance and Whole Life Insurance

Term life insurance policies are the simplest.  They last for a specified term (from one year to 30 years, or to a specified age) and pay out a death benefit only if you die within that term.  The most common type of term life insurance policy is level term, but decreasing term policies are also available, along with a newer return-of-premium term life insurance policy.

The advantages of term life insurance (versus whole life insurance) include:

1. It is less expensive.
2. It is simpler to understand.
3. You can use it to cover a temporary need (until your kids have grown up, for example).

1. It expires.  Because term life insurance covers you only for a specified period of time, if you're still alive (and want life insurance) at the end of the term, you will have to renew it.  Renewing term life insurance can be more difficult and more expensive as you grow older, especially if you have health problems.
2. There is no benefit but the death benefit.  If you outlive your policy or cancel it at any time, you get a grand total of $0 back.

Whole life insurance is more complex than term life insurance; there are more policy coverage variations within the whole life category.  Whole life policies last your whole life, paying out a death benefit whether you die at 25 or 125.  They also include a savings element, making part of your premiums available to take out as cash value.  In addition to traditional whole life insurance, universal (adjustable) life insurance and variable life insurance policies are also available.

The advantages of whole life insurance (versus term life insurance) include:

1. It never expires.  As long as you keep paying your premiums, you are guaranteed a death benefit.
2. It is a way to save.  You have the option of taking out the cash value rather than maintaining the death benefit.
3. Its tax advantages make it a helpful estate-planning tool.

1. It is more expensive.
2. It is more complicated.  You will need a lot more information to make a wise purchase of a whole life policy than a term life policy.
3. The rate of return on your "savings" is usually lower than what you could get investing the money yourself.

Types of Life Insurance