Term Life vs Whole Life

The two most common forms of life insurance policies are term life and whole life. The names are remarkably apt, in that:

• A term life policy lasts for a set period, say 10 years. If you die during that 10-year term, the policy will pay. If you don’t, it expires and that’s that; and
• A whole life policy lasts for your whole life. You absolutely will die during the policy period for a whole life insurance policy (although most will pay you the benefit before you die, if you live to be 100).

Typically, a term life policy provides protection for a period of one to 20 years. The best way to think of term life is as temporary insurance. A whole life policy, on the other hand, is permanent insurance. Term policies usually are used when you have a temporary need, such as:

• a mortgage;
• business obligations; or
• a particular need for income when your children are young.

Whole life products are effective when you have a permanent need, such as to:

• supplement your surviving spouse’s income;
• cover funeral costs, pay capital gains taxes;
• make charitable donations; or
• pass a family business from one generation to the next.

A term policy does not build any cash, loan or surrender values. It essentially provides a death benefit only. For this reason, it is usually the least expensive form of life insurance. Its low cost allows you to buy higher levels of coverage at a younger age, when your need for protection is often greatest. Of course, it would be simple if there were only one kind of term life policy to consider. Instead, there are three:
1) Level term. Provides a consistent amount of insurance throughout the policy period.
2) Decreasing term. Good for shrinking debt obligations (such as a mortgage), and starts with a specified face amount, which decreases annually until it reaches zero when the policy expires.
3) Increasing term. Provides a growing amount of insurance,but the need for this type of protection is rare.

Many term policies are also convertible, which means they may be exchanged for another type of life insurance. Choosing a convertible term life policy is one way to make sure you will be able to get permanent coverage at a later time, without having to prove that you are still insurable.

You won’t want to stick with term life insurance for your entire life (assuming that you live a long time). By the time you reach 70 or 80 years of age, the premiums for a term policy usually approach the face amount of the insurance, because the insurance company figures you’re going to die soon.