Whole Life Insurance Vs. Term Life Insurance: Who Benefits More, You or Your Insurance Agent?

When my husband and I first got married, we were told that part of being responsible adults was to plan for the inevitable – – death. Trying to be responsible adults, we met with our insurance agent to discuss life insurance. We were presented with two types of life insurance by the agent – – whole life insurance and term life insurance. Our insurance agent had a definite opinion as to which policy we should purchase and slanted the pros and cons of each life insurance policy to benefit him. Neither policy is bad; however, depending on a person's individual situation one policy is typically better for them than the other life insurance policy. Below are the pros and cons of whole life insurance and term life insurance, provided without an insurance agent's sales pitch.

Whole Life Insurance

  • Cost – More expensive
  • Length – Does not expire as long as the premiums are paid
  • Ease of obtaining – More difficult, may require health exams
  • Value – Builds additional cash value on top of death benefits

Term Life Insurance

  • Cost – Cheap coverage
  • Length – Expires at a certain age or time
  • Ease of obtaining – Easy to obtain, many employers offer as part of their benefits
  • Value – No value other than death benefit

Term life insurance rates are far more affordable than whole life insurance. It is advised that you have two or three times your annual salary in life insurance to provide for your family if you die. Many people will not be able to afford the large premiums required to have that much coverage under a whole life insurance policy. Furthermore, if you cannot afford the premiums after a few years, the cash value of a whole life insurance policy will not come close to the premiums you have paid. On cost of premiums, term life insurance is a better buy.

Whole life insurance policies do not expire if you pay the premiums; however, term life insurance is exactly what the name implies – the policy is for a set term of years or expires when the insured reaches a certain age. With whole life insurance, you will have something to leave your children but is that the purpose of life insurance. The true purpose of life insurance is to provide for your family if something should happen to you while they are still dependent on your income to provide for their needs. By the time the term expires on a term life insurance policy, your dependants will no longer need your income to support them.

Term life insurance is very easy to obtain and rarely requires a medical exam unless you need high coverage amounts. Most employers offer employees the opportunity to purchase additional term life insurance through their employee's benefits program. Whole life insurance is more difficult to purchase and often requires copies of medical records or a medical exam. Furthermore, there are many different types of whole life insurance policies so shopping for a whole life insurance policy can be overwhelming.

Term life insurance policies do not accumulate any value other than the death benefit or face value. The premiums you pay for term life insurance are "gone" if you outlive the term of the policy. Whole life insurance builds cash value that you can withdraw or borrow against during the life of the policy. If you are unable to pay the premiums, the cash value can sometimes be used to pay the premiums but it takes years (10 to 15) to build up any substantial cash value in most whole life insurance policies.

Bottom Line

My husband and I were talked into purchasing whole like insurance policies by our insurance agent. He told us this was a great way to save money for the future (the cash value) and would be available to us during our retirement if we need additional funds to pay bills. Of course, our agent wanted us to purchase the whole life policies because they make more money from the premiums on these policies than on term life insurance policies. The truth is that the term life insurance policies would have been a much better investment. Life insurance companies offer very low interest rates on whole life insurance so the higher premiums would have been better off invested in another type of retirement account. Furthermore, we were unable to continue to pay for the high premiums several years later so we lost all of this money because the policies had not accumulated more cash value than the surrender charges.

We now have low-cost term life insurance policies that equal three to four times our annual salaries. We invest our money into retirement accounts that provide more growth and are better investments than using a life insurance policy as a "forced" savings plan. We treat our life insurance as it should be – – a safety net should something happen, while we are young, and need both incomes to support our family.