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Christy Bieber The Motley Fool
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Term life and whole life are both life insurance. As the name suggests, whole life policies can remain in effect for the rest of a policyholder's life. There's no set time when coverage ends, and the death benefit is paid out as long as the policy is active. Term life policies, on the other hand, are in effect for a limited time, and no death benefit is paid if the policyholder lives beyond the coverage period.
While whole life insurance may sound attractive at first glance, there are three important reasons term life coverage is the better choice for most people.
Term life insurance is less expensive than whole life. In fact, rates for whole life insurance can be as much as five to 15 times what you would pay for a whole life policy. A young, healthy person could get term life insurance for a few dollars a month, ensuring affordable coverage for decades at a fraction of the cost of a whole life policy. Even those who wait until they're older to buy policies and don't qualify for rock-bottom rates can generally still find affordable term life insurance. That's not necessarily the case for whole life coverage.
One reason whole life insurance is so much more expensive than term life insurance is its investment component. Premiums are therefore higher than what's required for insurance coverage alone.
Whole life also accrues a cash value. While this could seem to justify paying much higher premiums, it really doesn't in most cases. Accessing the money from a whole life policy could involve surrendering coverage or borrowing against the policy. There could be high fees associated with cashing out, especially if it is done early.
Even in a best-case scenario, the return on investment that a policyholder is guaranteed with a term life insurance policy is usually well below the ROI they'd likely get by investing in an S&P index fund or building a portfolio of diversified assets.
Some people justify paying high premiums for whole life insurance, arguing the cost is worth it because the coverage stays in effect indefinitely and the death benefit is always paid out -- which isn't the case with a term life plan.
But most people don't need insurance coverage forever. At some point, kids grow up, houses get paid off, and people no longer rely on a paycheck for income because they've saved for retirement. At that point, there's little use in having a large life insurance policy, since surviving family members aren't reliant on the deceased person's income or help.
The bottom line: Term life coverage is cheaper and provides the protection most people need -- which means it's usually the better option for insurance coverage.
