Ask the Life Insurance Expert

Which insurance is better, term life or whole life insurance?

Neither is better. It depends on your individual needs. As you may already know, term life provides coverage for a certain period, such as 15, 20 or 30 years. If the insured person dies during that time period, his or her beneficiaries collect the death benefit. Once the period is over, though, the coverage ends.

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Whole life insurance, as its name implies, covers the insured for his or her entire lifetime. Beneficiaries collect the death benefit, whether the insured dies a month or 50 years after the policy is in effect. Whole life also features a cash account that gradually grows tax deferred. Policy owners can borrow against the cash value at rates that are generally lower than what banks offer. Once the cash value has grown to a certain level, they can also use it to pay premiums for the policy. If you decide to surrender the policy, you can collect the cash value or you can convert it into an annuity.

So which one should you choose?

Term life is best when your big expenses are temporary, such as mortgage payments, care for your dependent children and college tuition payments. You can coordinate term life to expire when those expenses have disappeared, such as when your house is paid off or your children have graduated from college and are living independently. Term life insurance premiums are lower than whole life insurance premiums, allowing you to use the extra savings to invest for your retirement.

Whole life, also known as permanent life insurance, is a good choice if you want lifelong coverage and wish to provide money for your heirs no matter when you die. Consumers who purchase whole life often use the policy for investing for retirement through "forced savings." Beware, though, it can take 20 years or more for the cash account to build substantial value. Permanent life insurance might be a good idea if you have an estate to protect -- the death benefit would provide your heirs with money to cover estate taxes -- or if you have a lifelong dependent, such as a disabled child, or want to ensure continuity for a business you own.

Bear in mind that the group life insurance you have through your employer disappears if you leave your job or get laid off. To fully protect your family, consider buying your own life insurance policy.

For more, see term vs. perm life insurance: Which one is right for you?

Last updated: Nov. 12, 2010
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