what is the difference between term life and whole life and what is better to buy?

Question

I would like to buy insurance for myself but what is best. term Life or Whole life and what is the different.

Answer 1

Hi, your friendly insurance guy here again. :)

Long, but hopefully informative, post.

Let's get the ugly bit out of the way first:

Term is cheap, Whole Life is expensive. Whole Life pays an agent or broker more commission because it costs more and generally is given a higher percentage commission than Term products. I mention this because there are a lot of people who hate Whole Life products and think the people who offer them are sleazy. Thus, I am putting that bit out here right in front to satisfy the Whole Life Haters. :)

Here's how Term Works:
You buy it for a specified period of time (typically 1, 5,10,15,20,25 or 30 years). When that period, or TERM, is over, you can usually renew it yearly at a vastly increased cost until you reach a particular age. The age at which you can no longer renew vaires by insurance company. If you live past your TERM and have not renewed, your family gets nothing and you have lost all the premium money you spent (unless you have a "Return of Premium" rider, which not all companies offer and which is often extremely expensive to add).

Here's how Whole Life works:
You buy it now. It stays in force typically as long as you pay your premiums. The payments stay the same forever; ther eis no "holy crap the renewal cost is insanely higher than last year." It develops a cash value over time and in many cases the face value of the insurance goes up as well.

This, by the way, is the fallacy of all those people who say "the insurance company keeps the cash value when you die." That's not exactly accurate. As long as the cash value is in the policy, the typical function of it is to pay for additional face value of the insurance. So yes, while you don't get a check for the cash value when you die, your death benefit will be larger than the original face value of the policy, making it generally a wash. If you have had the policy for a very long time, the policy owner comes out ahead in many cases.

The cash value is NOT, NOT, NOT an "investment." That term is reserved for certain other things, like mutual funds. It can be called a cash accumulation vehicle or a savings vehicle. It is NOT an "investment."

The downside to Whole Life is that it costs a LOT more than the same face value of Term insurance - at least, in the short run. If you buy a 20-year term policy for $100,000 at age 25, start renewing it annually after it runs out at age 45, and compare your lifetime costs, the Term policy will absolutely kill your wallet. The Whole Life policy in the long run costs a LOT less than constantly renewing an old Term policy. This does NOT mean Whole Life is for everyone. It's only appropriate in some situations and for certain clients with specific needs.

So which one is the best? This is the part where I hope folks who are shrieking "But...but Suze Orman told me to buy term and invest the rest" realize I am not some commission seeking scumbag:

IT DEPENDS. There is no "off the cuff" answer. To know for sure which is the best for you, your specific situation needs to be evaluated. Contrary to what other folks may say, I do recommend using an agent. I do that because I am one and I treat clients properly. If you go to an insurance company directly, you lose the benefit of having a local contact. And guess what? Generally life insurance companies are NOT going to give you a discount because there's no agent involved. They charge the same and keep the commission money themselves.

So talk to an agent. Talk to several. Find one that you are comfortable with. The agent should be focused on doing a full evaluation of your specific needs. Be careful with anyone who says:

"Buy Term and Invest the Rest." (they have a preconception of what's right without wanting to consider your case may not fit their mold - ask if they are willing to consider other viewpoints based on your particular situation)

Or

"Get 10 times your salary" (anyone choosing the amount based on a formula is giving you a canned answer, not one tailored to your particular needs. Ask if they can help you arrive at a number tailored to your family's needs rather than using a formula)

and run from anyone who does not try to do a full evaluation.

Look for someone who will help you BUY insurance, rather than try to SELL you on something.

And I know this is a scary one, but once you have done the evaluation, ask if that company does temporary binders/receipts. If they do, it means you can get coverage in force while the application process is under way. If it's available, DO IT. Fill out the application. Once you have your evaluation and know what the right amount is, do the application as entirely TERM insurance, even if you are getting other types. Have hte agent include a cover letter and notes in the application to process you for approval but NOT to issue the policy till the underwriters speak with him or her. This will keep the expected first month's premium low. Write the check for the first month and give it to the agent. Why do that?

BECAUSE YOU ARE NOW COVERED, and once you are approved, you can always have the agent call the underwriter and say, "Hey, remember Mary Jones who got approved for $750,000 of 20-year term? Well, she wants it issued as $500,000 of the term and $250,000 of Whole Life."

You are allowed to decline to accept the policy and get a refund any time during the application process, during underwriting, and past the time you accept delivery up till the end of what is called the FREE LOOK period. IN my home state, that is ten days long.

So in reality, you are not committed to anything till ten days AFTER you've been approved and had the policy delivered.

Once you get approved you can change what KINDS of insurance you'll receive.

What you don't want to happen is that you die after having taken the trouble to go through the process, but NOT bound the policy. Can you imagine how badly it would suck if you actually did all this but did not pay the first premium so you could bind the policy and then died on your way home from the application appointment?

Remember, you can get your money refunded to you any time up till the end of the Free Look period. Why not get the coverage in force from the day you do the application?

Answer 2

Term is temporary---for a term of 1-30 years. Depending on your debts or your future plans this may be the most economical. Example: to pay off your mortgage.
There is never a cash value and when you are done paying for the term, it is worth nothing.
Whole life is permanent. This you purchase and it stays with you forever. It earns a cash value &/or divends in some cases. You can borrow against it, etc. This is much more expensive but as long as premiums are paid it is always there for you or your beneficiaries. Premuims are a set level amount and do not change.
Universal is like have 2 policies in 1. It is considered a type of wholelife because it is permanent and can last your whole life. Is really a renewable term policies with an annuity or other investments attached. If the investments make enough money to keep up with paying the increasing term premuims every year then it works great. If they don't the payments can "eat-up" the cash value in the investment side and then you have to make larger payments then what you originally stated with. Sometimes they grow so large you end up getting a smaller policy so it more affordable or it cancels. I have seen many upset people reguarding these policies.

Answer 3

The above posts do a fair job of describing the products. My concern is the question "which is better?" Neither is "better." Each has circumstances for which it is the best application. The truth is that most people need both, for a variety of reasons. If it's a temporary need, term is normally the solution. If not, permanent coverage is needed. A thorough analysis by a qualified financial advisor can remove the guesswork. Also, just because term coverage has a lower premium doesn't mean it's less expensive. The shorter the term, the lower the premium; but if you choose too short a term, the renewal premium will likely be astronomical. A whole life policy will normally begin paying its own premium out of dividends at about the 12th-15th year, resulting in about the same total premium outlay as a 30-year term, but remaining in force your entire life. Also, whole life isn't your only option for permanent coverage, but that's a whole new topic. See a financial advisor, not an insurance salesman.

Answer 4

Difference of whole life and term
Whole Life (Universal) = Permanent policy = Higher Premium = can give you a tax free income during retirement if you fund it right

Term Life = Temporary policy = Lower Premium = it you need more coverage after the term is over you are looking at a possibility that those rates will be sky high or if you have a bad medical history not be able to get new coverage

What are you looking to protect and how long.

I can run some quotes for you though about 20 different companies if you want to find out what best fits your needs.

I am a big fan of having 2 policies like it was said above a $100,000.00 UL and what ever else that you would need in Term.
A Life Insurance Specialist Licensed in over 20 states

Answer 5

Whole life is insurance you buy where some of the money goes to pay for a life insurance contract (that pays if you die) and some goes into an investment vehicle.

You'll likely hear from some who say it is a good idea.

It is ONLY a good idea for a very few people who fall into certain categories.

Higher income wage earners who can afford both the premium payments and other investment and spending outlets like college savings, mortgages, etc. AND that want to leave a legacy for their heirs beyond what they can save on their own.

Whole life is much more expensive because it builds up a cash value which can be tapped for things like college savings, premium payments, loans, etc.

Whole life also makes an enormously higher rate of commission for the seller, which is why you need to consider that carefully when deciding using an agent's recommendation as the basis for your decision.

For everybody else, term is best. It is just plain insurance with no cash value and no investment availability.

You can lock in a low rate for as long as 20 or 30 years. But, note that when the term is up...the insurance is gone and all the money you've paid is gone as well....but it was used to provide peace of mind that your family would have been taken care of had you died....which you didn't.

You can take the money you save between whole life and term (and it will be substantial) and invest it your self without having to pay big commissions or fees. Use that savings to save for college, pay off the house, or invest it yourself.

Answer 6

There is no "best" to buy. It depends on what you need insurance for.

Term life is usually annually renewable. For example, you buy 100,000 of term insurance at age 35 and the cost is $150 for the year. Next year, when you are 36, the cost may be $155. And the following year, when you are 37, the cost may be $172. By the time you reach age 52, the cost may be $380. And term insurance usually cannot be renewed beyond age 70.

Whole life is usually for a set period, to age 65 or 70 or 75 or 100, depending on the policy. For example, you buy 100,000 of whole life at age 35 and the cost is $225 per year, every year until the policy matures (no more premiums due).

Another difference: Term insurance is pure insurance. Whole life has an investment portion in the policy. It earns cash value that you can take a loan against should you ever need it. Also, some whole life policies pay dividends as well.

Answer 7

Anyone that tels you that term is the absolute only way to go (Suze Orman), is not considering your individual needs. It is not always so cut & dry based on price alone.

you could go for a combination approach. Small whole, & large term. That is, if you need to. You should sit down with someone that will give you a good answer based on your need not the sale. There are several variants to whole also. Someone was saying something about only adding on at certain times for certain amounts. That is what thier agent gave them. If they are an independent agent (like me), they can offer several options from other companies, not just what that company sells.

Different companies offer different products. Even though it is the same life insurance, the product may have different features (riders). One company could have 5 different term products that fill different needs. Some let you do paid up, some dont. Accidental riders to double the policy, cash back term, some may not need a physical under a certain amount, some require it anytime.

Ask friends & family for a referal.

Answer 8

term life covers you for a term of one or more years, it pays a death benefit only if you die in that term. It generally offers the largest protection for you money, and does not build cash value. You can also only renew it for more terms, but each time you do, the premium gets higher. So you buy life insurance for a ten year term, pay whatever amount a month, if you are still living after ten years, the premiums go up if you want to renew it.

whole live covers you as long as you live if your premiums are paid. And premiums generally never go up. Premiums are usually higher at first, but stay the same, so later in life, they are smaller than what they would be if you get insurance then. Some whole life policies let you pay premiums for a shorter period of time, like 20 years, but premiums are higher.

It all depends on what you want. I just got that info off of my policy, which I am about to pay right now, there are also cash value policies, univeral life policies, and variable life policies, but that's too much to type right now, email me if you want more info.

Answer 9

Well, to quote a friend:
"Whole life insurance is where you put your money in a hole where it never returns." Which is a bit odd, since technically a whole life policy pays you back if you keep it long enough. What he was referring to was that if you invest the difference between a whole life and term life policy you would have to be either unlucky or stupid not to come out ahead. Basically whole life insurance is intended for your whole life. You lock in a premium with set points in your policy at which you may purchase additional coverage as you mature. Term life is, as the name implies, more limited in scope. You pay for it as you go. I am not going to knock your preference one way or the other, but bear this in mind: Insurance is not an investment, no matter what the salesmen tells you. Stocks, Bonds, Mutual Funds, Money Market Accounts, etc. are investments. You will NEVER come out ahead attempting to misuse whole life insurance as an investment instrument (unless you find a salesman considerably more generous than any I ran across).

Edit: The problem I ran into tended to be one of flexibility. I could only increase my coverage at certain times by a certain amount. This invariably reduced to A.) pay for coverage I do not need (aka: waste money I could invest) or B.) get stuck with too little coverage and pick up another policy later in life which sort of defeats the purpose. I ran some numbers on what different policies would cost me and for me (being the young guy that I am), term made a lot more financial sense.

Answer 10

You seem to have gotten the expert answers, so I will give my humorous way of thinking about it. Term and whole life are like a raffle ticket and a savings bond. With term insurance you get the big payoff if you die before it expires, or you get nothing. Whole life normally has higher costs, but you are assured of getting some value back. A good insurance agent is your best bet.

Answer 11

I'll make it simple: Buy term and invest your own money. Whole life can be too risky. The whole point of insurance is to cover you until you are self insured. If you need insurance your whole life, then something is wrong with that picture. You shouldn't be 75 years old still needing burial coverage.