Life insurance steps in and covers any financial gaps left by your passing. These gaps might include your mortgage payments, child’s private school tuition, and health care expenses. They can include your credit card balances and even your funeral arrangements. Lacking coverage, your spouse and family might find themselves without the financial resources necessary to meet their needs. The question is, which type of policy is better for your circumstances: term life insurance or whole life?

Each person’s financial plan is unique. For that reason, it’s impossible to say that one type of life insurance coverage is always superior to the other. With that in mind, we’ll provide an overview of term and whole life, including the strengths and weaknesses of each product. That way, you’ll be able to make an objective decision based on your situation.

Term And Whole Life In A Nutshell

While there are several nuances that are dissimilar between term life insurance and whole life, all spring from one overriding difference: a forced savings option. Term life is a temporary policy that pays a cash value upon the policyholder’s death. Sometimes, the policy is renewable each year with steadily rising premiums. Other times, the contract “levels” the premiums for a defined period (e.g. 5, 10, 20 years, etc.).

Whole life insurance blends a cash payout with a forced savings option. This latter feature is often promoted as an investment vehicle. The value of this option is based on a basket of underlying securities, which can include bonds, stocks, and other instruments. Over time, the value of the investment portion rises, allowing you to borrow against it.

The Problem With The Investment Option

Initially, the investment feature (or forced savings option) seems attractive. A portion of your premiums is automatically allocated toward the investment piece, which rises in value. However, the rate of return most policyholders realize is rarely, if ever, competitive with alternative investment vehicles. A low-end mutual fund will usually outperform the basket of securities underlying the whole life contract.

Making matters worse, most of the data that would reveal this disadvantage is hidden from the policyholder. This happens for two reasons. First, it is nearly impossible to determine the percentage of your premiums that is allocated to the investment portion. Second, lofty fees and commissions can obfuscate the matter further. They’re often equal to the aggregate premium you’ll pay during the first year.

The above is not to suggest that whole life insurance is always a poor choice. There are times when such a policy may be appropriate.

When A Whole Life Policy Makes Sense

One of the reasons many people choose whole life over term insurance is because the former does not require you to submit to a medical examination. That should raise a warning flag. The insurer is willing to abandon caution and extend coverage to a person who may have an existing medical condition. The reason they’re willing to do so is because there is a significant amount of profit packaged into the policy. That means you’ll pay more for the coverage.

Whole life can also be appropriate for those with substantial wealth who carry the contract for decades. The cash value of the investment portion combined with the payout upon death can be used to settle their estate taxes.

Should You Switch From Whole Life To Term?

Suppose you already have a whole life policy and are now wondering whether term insurance is more appropriate for you and your family. Should you switch? It depends. There are two important factors to consider.

First, you’ll need to consider your policy’s cash value (it’s often called a surrender value). This is the amount your insurer will pay you if you decide to terminate your contract prior to its maturity. The problem is that it takes more than a decade for the cash value to grow due to fees and commissions. If you terminate a policy during your eighth year, you’ll receive very little compared to the amount you paid in premiums.

Second, you’ll need to submit to a medical examination before an insurer will offer a term life contract. If you’re a habitual smoker, suffer from existing health conditions, or are over the age of fifty, a term policy may not offer significant savings.

Bottom line: review your situation and investigate your options. For most people, term life insurance offers far more value than a whole life policy. That said, as mentioned, each person’s circumstances are unique. Your first step is to identify which type of coverage is suitable for you and your family. Then, shop for life insurance rates online to compare reputable insurers side by side. You’ll find that doing so can help you save a significant amount of money. Kade Phillips is a contributing writer for the popular insurance quote comparison websites powered by Kanetix. Want to lower your insurance costs? Visit us for cheap life insurance quotes, auto insurance and much more. If you’re from Canada, we invite you to visit kanetix.ca, for less expensive car insurance in Canada and lower costs on just about all of your other personal insurance needs.

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