Whole Life and Term Insurance

Should I purchase whole life or term insurance? This is perhaps the most frequently debated question when it comes to life insurance. If you do some homework, you will uncover articles and opinions that state whole life is the only way to go and others will state term insurance is the only way to go. The viewpoints are polarizing; so how is one to make an informed decision as to which form of insurance is most appropriate? This checklist with help you do just that.

By way of background, term insurance provides coverage for a finite period of time. Policy durations are typically 10, 20 or 30 years. Premiums remain level for the duration of the policy, but spike in years 11, 21 or 31. If you die during the term, the carrier pays the death benefit. No benefits are received if you live beyond the term.

Whole life insurance provides a death benefit for the insured’s whole life. Premiums are guaranteed to remain level for the duration of the policy, and there is a living benefit in the form of cash value that can be accessed by the policy owner while the insured is alive. Dividend paying whole life policies typically have an increasing death benefit as opposed to a flat level benefit as is the case with term insurance.

First things first — find an experienced, trustworthy insurance broker. Obtaining guidance from a knowledgeable insurance broker is valuable. They will not only help you think through the issues that dictate which form or forms of insurance should be considered, but they will also ensure that ownership and beneficiaries are setup correctly. A casual mistake could transform the tax-free insurance benefit to a taxable benefit. If you do not know a knowledgeable broker, ask friends, family, or work colleagues for a referral.
 
One important criterion for deciding what form of insurance is appropriate is the length of time for which the benefits must be available. Generally speaking, term insurance is an appropriate option when the need for coverage is temporary. Examples include needing insurance to cancel a 10-year bank loan or to ensure your 15-year-old child will have a college education should you unexpectedly die. These needs are short-term in nature. If the need is long-term or permanent, such as the need for cash for a child with special needs regardless of when mom and dad die, whole life becomes a viable option. 

A second factor to consider is cash flow. Term insurance is the less expensive of the two options as it provides coverage for a finite period of time. If cash flow is so tight that whole life insurance premiums, which are higher than term, would cause financial hardship, term insurance is the way to go. 

Yet another thing to consider is your overall financial position. Are you contributing to your retirement plan? Do you have an adequate rainy day fund? Is your job secure? These important financial planning building blocks should be in place before allocating dollars to whole life.

If your need for insurance is long-term in nature, cash flow is flexible, and your financial house is in good order, whole life becomes an attractive option, especially in a sluggish economy. Policy values, including the death benefit and cash value, can experience significant growth the longer the policy is in place. The death benefit and cash values are guaranteed, and in many cases the values are significantly higher than the minimum benefits guaranteed by the insurance carrier.

Do not be swayed by blanket statements or rules of thumb when it comes to purchasing life insurance. Analyze your financial position, determine how long you need insurance, review your cash flow and engage a knowledgeable insurance broker. Together you and your broker can make a decision that is in your best interest.