Term Life Insurance vs Whole Life Insurance. Should you choose term life insurance or whole life insurance? Most important factors to consider before making your decision.
Term vs Whole Life Insurance: Investment Component
The major difference between term life insurance and whole life insurance is that whole life insurance also offers an investment component. This may sound attractive when you first hear of it, but probe into it further: you have no control over what your investments will go into (money market, equities, bonds, mutual funds, REITs?); the insurance company is at liberty to do whatever it wants with your capital.
Historically, returns on whole life investments are mediocre. Yet, they carry high fees and commissions. Commissions on annual returns can total as much as three percent, meaning that your savings will grow even more slowly.
Term vs Whole Life Insurance: Age
Nonetheless, age is an important consideration as well. Those above the age of 65 would have no choice but to purchase whole life insurance, as new term life insurance policies would no longer be available for them.
Furthermore, term life insurance premiums for those below 50 are extremely affordable – much less compared to whole life insurance premiums. Thus, term life insurance policies would generally be a much better choice for those in their midlife.
Term versus Whole Life Insurance: Estate Planning
Nonetheless, in evaluating term insurance vs whole life, an important benefit of whole life insurance is that it is a good asset protection vehicle. Whole life insurance policies are helpful for estate planning purposes, as you can set up an insurance trust that could be used to pay estate taxes.
Bottom Line: Term Life Insurance vs Whole Life
Generally, term life insurance is the way to go – unless you have specific reasons for choosing whole life (perhaps for asset protection purposes). The other reason why it may be advisable for some people to keep their whole life insurance is that if they have already held it for a long time, much of the initial premiums paid can only be recovered after 12 to 15 years. Thus, switching policies may mean losing most of the premiums paid.
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