Comparing Whole Life Vs Term Life Insurance

It is easy to get confused when comparing life insurance policies. If you have never purchased life insurance before, don't let the insurance salesman talk you into anything without doing some homework first to determine what you really need. For starters, you need to decide between whole life vs term life insurance.

The main difference between the two different types of life insurance is that a term life insurance policy is just life insurance. It does not build up a cash value like a whole life policy does. If you die, your beneficiary gets the money; if you don't, well at least you were covered by the policy in case something had happened to you.

On the other hand, a whole life policy is marketed as an investment. You get life insurance, but you also get a policy that can be cashed out if you decide to cancel the policy before you die. If you pay the premiums on a whole life policy for a number of years, it may be worth a few thousand dollars or more by the time you retire.

Don't be fooled into thinking that a whole life policy is better just because it has a cash value. That is not necessarily true. In fact, in most cases you will find that the term life is actually a better value if you stop to do the math. This is because when you buy whole life, you pay for both the insurance and the investment. However, you can only ever get one or the other, not both.

When you are comparing a term life policy to a whole life policy, you have to take more than the price into consideration. Of course a whole life policy will be more expensive than a term life policy. But what more are you receiving in exchange? The salesman would have you believe the cash payout from a whole life policy provides extra value, but you don't really get both the cash payout and the insurance.

If you die while you are insured under a whole life policy, your beneficiary will get the life insurance amount, but not the cash value. So you could have gotten the same result by purchasing the cheaper term life policy. The cash value can't be redeemed if the life insurance is paid out.

Now consider what happens if you buy a term life insurance policy. You save money over the cost of the whole life, so why not take the money you saved and use it to purchase an investment, such as a mutual fund. You still have the life insurance coverage, but now you have an investment too, and since they are separate, your beneficiary will get both the insurance and the proceeds of the investment when you die.

Make sure you consider how much each plan will yield either way - whether you die while insured under the plan or you live long enough that you either can't get or don't need life insurance anymore. If you analyze both plans, there is a pretty good chance you'll find that the term life policy is the better choice.