Whole Term Life Insurance

Although for most people, the answer to this question is going to be term, the reality is that whole life insurance can also be a good choice. For younger individuals, the question is really whether one is looking for pure insurance or for a combination of insurance and a retirement savings plan. For older individuals, the choice may be preordained.

Term life insurance is a contract where an individual can pay a set premium for a set amount of time, typically ten to thirty years, and if they die, or with some policies, suffer some form of dismemberment, during that period, their beneficiaries will receive a lump sum payment. In the event that they do not die, they will have forfeited their premiums. It is typically used to protect a family against the loss of the primary breadwinner during that person’s earnings years. Term insurance is relatively cheap, with monthly premiums for a million dollar policy for a healthy forty year old man typically under $100.00 for a ten year term. The reason that term life insurance is so inexpensive is that the odds that a healthy forty year old man who participates in no dangerous activities will die before his fiftieth birthday infinitesimally small.

Whole life insurance is a policy which will have a stable premium and a stable death benefit for one’s entire life. As long as the premium is paid, one can hold onto the policy. The premiums for whole life coverage are orders of magnitude higher than for an equivalent term policy, which makes it more expensive. The benefit is that over time, savings build up in the policy, and it gradually builds a cash value. This value can be borrowed against, and the policy can even be turned in to receive a distribution of the cash value. Whole life insurance is expensive for the benefits that it offers, although for those who will hold onto the policy for long enough to outstrip the front loaded costs, it can offer a decent return, albeit one that is inferior to the returns available in the stock market. One final benefit of a whole life savings plan is that the interest is tax deferred. One only pays taxes on amounts that are taken out that are in excess of the total premium paid.

For younger investors looking for a forced savings plan with some insurance benefit, whole life insurance can make a certain degree of sense. Conversely, younger and middle aged people who need protection for their families in the event of a loss of their income should look into term life insurance due to its ability to bridge the 20-30 prime earning years at a relatively low cost. Older people or those in extremely poor health, though, are typically unable to benefit from low term insurance rates. For those in that situation, whole life insurance, which typically puts less focus on one’s medical condition, can make better sense.