Term Life Insurance vs. Whole Life Insurance

Term life insurance, also called temporary insurance, covers a person against death for a limited period, the term. For example, the term might be until college is paid for, the children are grown, or until retirement. You pay for the coverage period and at the end of period the contract, or policy, expires. If no claims are made against the policy during this term, you receive no benefits after the policy expires, just like homeowners or auto insurance.

Whole Life insurance, also known as permanent insurance, is permanent and does not expire (assuming you continue to pay your premiums). It provides similar coverage as term life insurance, but it also provides an investment vehicle. A part of each premium goes toward insuring your life insurance while the rest goes toward an investment account. This investment account can be either a stocks and bonds investment account or an interest bearing account.

Which is better (our opinion)? Young families with large financial obligations are usually better off with term life insurance. The greatly lowered premiums enable them to purchase adequate coverage to protect against loss of income. Any alternative investment funds can be placed in other vehicles (money market accounts, mutual funds, etc.) that are more likely to generate returns similar to, or better than life insurance contracts. Cash value insurance is sometimes purchased by people for estate planning and tax purposes. You should consult your financial advisor for the advantages of conventional life insurance or term insurance.