Whole Life Insurance vs Term: Which One Is Right for You?

Here’s an alarming statistic: Just a little more than half of all consumers surveyed reported owning life insurance, according to industry group LIMRA in 2024. That means just about half don’t.

Why is that alarming? Consider why it’s important to own life insurance. We own life insurance to ensure our loved ones are taken care of when we pass. Some may be reluctant to consider their own mortality. But the reality is none of us can escape it, so it’s best to be prepared. Others may avoid addressing this financial responsibility because they think it’s more expensive than it is – but the LIMRA study also found that the surveyed consumers have consistently overestimated the cost of basic term life insurance. Whatever the reason for holding back, going without life insurance can be a costly mistake.

It’s best to avoid thinking of the sad circumstances involved when life insurance comes into play, but rather the peace of mind you gain from having it in place.

Even if you already have life insurance, are you sure you have the right insurance to cover your loved ones and that you have enough coverage? There may have been major life changes since you bought your original policy. Over the years, your financial circumstances or family dynamics may have changed – more children, grandchildren, a divorce or remarriage. Does your current life insurance reflect those changes?

There are key criteria to help you choose enough insurance as well as the right policy. Let’s discuss them as well as the pros and cons of two major types of life insurance – term and whole life.

KEY QUESTIONS TO ASK WHEN LOOKING FOR LIFE INSURANCE  

Here are three main questions you need to answer when searching for insurance.

1. What are your financial goals for life insurance?

For many, the most important reason to buy life insurance is to leave behind the financial resources your dependents will need by replacing your loss of income. But this goal needs to be defined further.

How long will you want to provide this protection? Do you want to provide it just through your working years when your children are entirely dependent on you or throughout your life? Of course, your life insurance goals may extend beyond your dependents and could include helping to pay for funeral expenses and/or taxes or debt associated with your estate. You can also leave your life insurance proceeds to a favorite charity.

Your goals can help determine your policy amount and the kind of insurance you choose.

Ideally, these goals should be part of an overall estate plan that you create with an estate planning attorney in cooperation with a financial advisor.

2. How much life insurance do you need?

If your primary goal for your life insurance is to provide for your dependents, there is a trick to help you determine how much life insurance you might need. First, take the policy amount being offered. Cut the total policy amount in half and drop the zero. So, if the total policy amount is $500,000, you cut it in half and get $250,000. Then, drop a zero and you get $25,000.

That’s how much money your heirs might be able to generate in annual withdrawals to replace your income from the policy’s death benefit. If $2,083 per month doesn’t sound like enough to provide for your family, then $500,000 isn’t enough insurance.

Besides helping to support your dependents, there may be other needs that you want your policy to cover. An insurance specialist can work with you and your financial advisor to help determine how much insurance you may need.

3.  What are the best rates?

You want to pay the least amount for the highest level of services you can get, but that doesn’t necessarily mean the lowest premium. It means getting the best value. The life insurance industry is a very competitive market, so take advantage of that and shop around for the best value that fits your needs.

Remember that insurance agents represent insurance companies while brokers sell policies from different insurers. As you do your due diligence, you’ll likely see illustrations as part of a sales pitch, but they are just projections and the reality for you could prove quite different. An insurance specialist can function as an objective arbiter to help you determine which policy will suit your needs over the long term.

Note: If you’re switching life insurance policies, don’t cancel your current life insurance policy until the new policy is in effect.

TERM VS WHOLE LIFE INSURANCE

As you determine the financial goals for your life insurance, consider how much life insurance you need and evaluate policy pricing, you will come across two primary types of life insurance: Term and permanent life insurance. The most common type of permanent life insurance is whole life.

Generally speaking, we believe term insurance covers most people’s needs sufficiently, so let’s get into comparing these two insurance types.

Term Insurance

For many, it’s most important to provide life insurance during your working years when your children are fully dependent on you. This could entail a policy with a term up until retirement age and/or until your youngest child is out of school (and independent). Term insurance does exactly that – a policy that’s in effect for a set period, usually between 10 and 30 years.

Because a term life policy provides for a set amount of time and is often in effect during one’s younger years, a key benefit is that it costs less than whole life or other permanent life insurance.

Whole life insurance

Whole life insurance is a common type of permanent life insurance that can stay in effect your entire life provided you pay the premiums, with coverage that can go up to age 100 and sometimes beyond. In addition to a permanent death benefit, whole life insurance has cash value that grows over time (based on dividends).

Part of your whole life insurance premium goes toward building cash value that can grow at a fixed rate each year (although there are permanent life insurance options that grow at a variable rate). You can borrow against that cash value in the form of a life insurance loan, or you can withdraw from the cash value at some point.

One benefit of whole life insurance is that premiums typically remain constant throughout your life.  However, whole life insurance is more expensive than term life insurance.

Another option, universal life is a permanent life insurance which has premiums that may adjust depending on your stage of life. Premiums for universal life will also be higher than term insurance.

Keep in mind that if you withdraw or take a loan against the cash value, it could impact the policy’s death benefit. Generally, we advise that insurance should not be used as an investment but rather to help protect against financial loss. We believe a diversified investment portfolio is a better way to plan for your investing goals.

Other considerations with whole life and term

The typical maximum age that a 30-year term life policy will be issued is 55. What if you need to buy life insurance after age 55? You could get a 20-year term policy, but term life can get highly expensive if you want to keep it beyond the level term period.

While we believe whole life insurance serves the exceptions rather than the rule, there are situations where it could make sense. For example, if you believe you will need help covering your estate taxes, then you could consider permanent life insurance. There also could be specific cases when a type of permanent life insurance could supplement a pension.

Ultimately, your life insurance choice will boil down to your unique circumstances.

Our advisors and in-house insurance experts are here to help you sort through your options so you can see how life insurance can strengthen your overall financial position and bring peace of mind.