Is whole life insurance ever a better option than term life insurance? It depends on what you want the life insurance to do for you. Life Insurance can be a very complicated subject, especially when it comes to choosing between term life insurance and whole life insurance.
The most straightforward reason for purchasing life insurance is when a family member with dependents wants to make sure those dependents will have enough money in case that family member dies. Term insurance is an excellent choice for that purpose. Choose the amount of coverage and the term to be covered and be done with it. As long as the premiums are paid every month, the coverage will be in place. When the term ends and premiums stop, the policy ceases to exist. Term life insurance has no residual value.
Businesses also have reasons to purchase life insurance. When business partners want to be able to buy each others share of the business from a deceased partner’s heirs, they will insure each other for enough to make the purchase. If the partners intend to stay in business indefinitely, term insurance might not be the best choice for this purpose because the term might expire before the partnership does. Whole life insurance, also called “permanent” life insurance, is just that. As long as premiums are paid, it stays in force and might be the better partnership option.
Another business use for life insurance is “key man” or “key person” insurance. If a business has a key executive, salesman, or other essential employee, a business can take out both life insurance and disability insurance policies for enough money to cover the costs of losing that person.
What is the difference between term life insurance and whole life?
One difference is term. Whole life insurance is “permanent” in the sense that it stays in force for life as long as premiums are paid. Term life insurance is just that, good for a set term only. Terms can often be adjusted, of course, but usually at a price.
Cost is also a difference. Whole life insurance policies generally have much larger monthly premiums than term policies. This is partly because the term policy has a fixed end date and partly because whole life insurance policies are also savings vehicles. A portion of the monthly premium accrues to a tax advantaged savings account. The policy owner can borrow those funds from themselves in emergencies, or even for planned expenses such as funding children’s college expense.
These days, tax advantaged savings programs such as 401ks and IRAs make the savings feature of life insurance accounts less attractive than they once were, especially since those accounts can also be tapped for home purchases and medical emergencies. Critics of whole life insurance say that an investor can make more on their money and stay in complete control of it if they purchase term life insurance and invest the premium difference themselves. Proponents of whole life point out that if the investment amount is optional, not every family has the discipline to keep it up. Because life insurance premiums include savings, they enforce that discipline.
Is whole life insurance ever a better option than term life? Yes, it can be the better option, depending on circumstances. The best place for a family to get advice on life insurance needs is to get a financial review and recommendation from an independent financial planner (one who does not sell life insurance).