Term or Whole Life Insurance?

Are you wondering if you should buy term or whole life insurance? The

term vs whole life insurance debate has raged on and on for decades. It will carry on forever. This is because there is no right answer. Life Insurance is a tool. Not a tool like a drill or saw, but a financial tool.

Asking which type of insurance is best is like asking what saw is best. It depends on what you want to cut with the saw. In some cases a chainsaw will be best, in others a jigsaw ... I think you get my point.

But you are wondering about life insurance not power tools!

What’s the Difference: Term vs Whole Life Insurance?

Term Life Insurance is very affordable when you are young but it gets quite expensive when you are old. Whole life costs the same for your entire life. So in the short run it is more expensive than term. But in the long run whole life is far cheaper. So if you only need insurance for a short time, go for term. Otherwise, buy some whole life if you can afford it.

Whole life builds up a cash value over time. It’s very modest savings so don’t buy this as your primary retirement plan. Term doesn’t have any cash value and expires around the age of 80 (some plans at age 70, others at 85). So term is great if you need a lot of coverage for a short time (under 20 years). But whole makes a lot of sense for estate planning (taxes at death, leaving an inheritance, funeral, charitable gift).

A Simplified Comparison

Many financial advisors compare term insurance to renting a house. You pay for shelter but never accumulate any equity. When your policy expires or you cancel the policy you have nothing to show for it - just like renting. Oh, and when you rent: every so often a landlord will increase the rent – term is no different – rates go up on a regular basis.

Whole Life Insurance is compared to owning a home. It is a long term solution because you build up equity and some policies are set so you don’t have to make any more payments after certain amount of time has elapsed. If you decide to cancel the policy you get some money back (just like if you sell your house).

So is Term or Whole Life Insurance is Best?

In a lot of cases term is the best tool for the job (yes, back to that analogy!). Buy term life if you need a lot of coverage because you have a lot of debt and you have dependants. But consider mixing in some whole life insurance for your long term needs. You will be glad you did.

PS … you could substitute a lot of things into the tool analogy. An example for golfers: What’s the best golf club?

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