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Which Is Better Term Life or Whole Life Insurance?

by Contributing Writer

Overview

There are many differences between term life and whole life insurance. Determining what your specific needs are will help you decide which one is better suited to cover your life. Many people carry both types of policies, using term life to cover their short-term needs and whole life to cover their long-term needs.
Definitions

Term life insurance is short-term, or temporary, insurance. Whole life insurance is long-term, or permanent, insurance. Both provide life insurance protection to the policy beneficiaries in the form of a death benefit if the insured dies. Typically, both types of insurance policies are sold by the same insurance company; however, term life insurance premiums cost much less because of its temporary nature.

Term Life

Term life insurance provides the owner a low-cost level premium for a certain term, typically 10, 20 or even 30 years. As long as the owner pays the monthly, quarterly, semi-annual or annual premium, the policy remains inforced. Term life insurance does not build any cash value. Once the initial term has expired, the premiums will increase dramatically. The owner can cancel the policy at any time.
Whole Life

Whole life insurance premiums also are level but are more expensive than term life premiums because the insurance company guarantees a death benefit and a cash value to the insured for the rest of his life. Whole life insurance cash value grows based on dividends or simple interest determined each year by the insurance company. The owner may borrow against the cash value or take surrenders (withdrawals).
Which is Better?

Determining which type of life insurance is better depends on your personal situation. It is common for life insurance agents to recommend a person cover their short-term needs, such as loans, mortgages and business debts, with term life insurance. As for a person's long-term needs, such as final expenses and income replacement--using whole life insurance is sometimes more cost effective because term life insurance rates increase dramatically over time.
Considerations

Determining what your overall insurance needs are is the first step in deciding if term life or whole life insurance is better for your personal situation. A needs analysis offered by a financial adviser could help you better understand what your short-term and long-term needs are. The professional also can help you better understand the advantages and drawbacks of each type of life insurance so you can make a solid financial decision on how to cover your life.