Whole Life or Term Life Insurance? Considering the Benefits of Both

By Rob Sabo on March 4th, 2010

There are two basic differences between term life insurance and whole life insurance. Term life insurance is pure life insurance coverage, with premiums paid in exchange for death benefits over a specified period of time or term. When making life insurance comparisons, this is the most affordable form of insurance.

Whole life insurance, on the other hand, combines a policy with an investment component. For that reason, whole life insurance is also known as permanent or cash-value insurance. The investments can include, but are not limited to CDs and Treasury bills.

Whole life premiums tend to be expensive because you pay for insurance coverage, as well as the investment portion of the policy. With the excess premiums (the funds that exceed the cost of life insurance) the insurance company establishes an investment known as an accumulation or cash value account. A whole life insurance policy builds value that can be borrowed against; however, any outstanding loans are deducted from the money that beneficiaries receive upon the insured's death.

Whole Life Insurance As an Investment: Pros and Cons

Because of the investment component, many people use permanent life insurance as an investment vehicle for retirement planning. There are benefits to this type of financial plan--mainly in the tax treatment of the cash value account. The funds that accumulate in the account grow tax deferred, so that capital gains and income taxes are postponed till a later date.

However, due to the higher premiums associated with whole life insurance policies, debate swirls over whether it's better to buy term life insurance and invest the funds saved on what a whole life policy would have cost. Money gurus often frown on whole life policies and say it's better to purchase affordable life insurance while you are young and premiums are inexpensive, and invest the difference on your own.

Factors to Consider: Whole Life or Term Life Insurance

  1. How much insurance do you need, and can you afford the higher premiums? Determine the amount of life insurance coverage you need, then compare premium costs between term and whole life policies. Buy the policy that most closely meets your needs and that you can afford
  2. What are your state and federal tax brackets? Examine your tax brackets--the benefits of the deferral on the accumulation account are only as much as the amount of taxes deferred
  3. Can you still buy affordable term life insurance as you age? As you age, you are categorized differently by insurance underwriters and pay higher premiums. Compare the costs of a guaranteed term life policy versus the cost of whole life

If you have a higher tax bracket and have a long time to wait until retirement, a whole life insurance policy may be a good bet for you. Consider your choices carefully when shopping for an affordable life insurance policy.

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